McDonald's Stock Hangs Tough Despite Reopening Setback

Dow component McDonald's Corporation (MCD) has halted the reopening of dine-in services in the United States for at least 21 days due to the nationwide surge in COVID-19 cases, underpinned by an out-of-control epidemic in the Southern and Southwestern states. War-weary investors are taking the news in stride, with the stock running in place ahead of the July 4 holiday, but already weak technical positioning could take its toll ahead of the July 28 earnings report.

The fast food giant is unlikely to proceed with reopenings after the three-week hiatus, given the current trajectory of infections, adding a fresh burden to third quarter profits and revenues. More importantly, the decision could induce other chains to follow suit, even in places that have reopened successfully. Taken together with newly mandated city and county-level closures, it could trigger a renewed surge in unemployment in the hospitality industry, undoing second quarter progress.

McDonald's faces an added burden because it leases properties to 85% of franchises, putting them on the hook for direct monthly payments. It had to provide support programs to keep the weakest franchisees from going bankrupt during the shutdown, further eroding profitability. And while many restaurants are now running successful pick-up and delivery operations, nearly all have reported some income loss without the benefit of dine-in services.

MCD Long-Term Chart (2007 – 2020)

The stock completed a round trip into the 1999 high at $49.56 in the second quarter of 2007 and broke out, stalling in the upper $60s in August 2008. It held up well during the economic collapse, holding new support after a 22-point slide. Positive price action reached the prior peak in 2010, setting off a strong uptrend that posted impressive gains before topping out just above $100 in the first quarter of 2012.

Failed breakout attempts in 2013 and 2014 carved a rectangular correction that ended in October 2015 when McDonald's launched the hugely popular "all-day breakfast" initiative. The subsequent breakout attracted strong buying interest, carving a well-defined Elliott five-wave advance into July 2019's all-time high at $221.93. It then carved a double top pattern with support near $190, breaking down with world markets in February 2020.

The decline posted a three-year low at $124 just above the .786 Fibonacci rally retracement level and bounced in the second quarter, stalling at the .786 selloff retracement level in early June. Price action has now settled around the .618 retracement, in a slightly bearish stance that just completed a monthly candlestick reversal. Look for a continued holding pattern in this price zone, perhaps lasting into late July earnings.

MCD Short-Term Chart (2018 – 2020)

The on-balance volume (OBV) accumulation-distribution indicator topped out two months after the August 2019 all-time high and posted a slightly higher high in February 2020. The subsequent distribution phase dropped OBV to the lowest low since October 2017, highlighting an aggressive shareholder exodus that will take time to rebuild. Unfortunately, the March into June bounce hasn't helped that effort, with limp buying power failing to pierce the midpoint of the first quarter downdraft.

Meanwhile, the stock has settled just above the January 2018 high, defending the November 2018 breakout at $180. It has been crisscrossing the 50- and 200-day exponential moving average (EMA) repeatedly since April but hasn't successfully remounted either level. The forces of gravity could take control under these circumstances, but this morning's reaction to Wednesday's bearish news suggests that time hasn't come just yet.

The Bottom Line

McDonald's stock is stuck like glue to the 50- and 200-day EMAs despite a decision to discontinue reopening plans for at least three weeks.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.