McDonald's Stock Looks Vulnerable After Record Run

Shares of Dow component McDonald's Corporation (MCD) rose 42% in 2017, capping a remarkable turnaround that started with the October 2015 introduction of the hugely popular All-Day Breakfast. The stock has failed to post new highs in this hot January market, despite the massive tax cut, and is now flashing a bearish divergence that could presage a painful multi-month decline into the $130s.

The monthly stochastics oscillator has been grinding out an impressive buying cycle for the past 14 months, longer than the typical six- to nine-month extension, and has turned lower in the past two weeks but has not generated a new selling cycle. That could happen with one or two wide-range down days at this point, telling shareholders that it is time to review exposure and take defensive measures because price action could underperform into the third quarter.

MCD Long-Term Chart (1997 – 2018)

The stock blasted its way higher between the mid-1980s and the new millennium, splitting five times while rising from the low-single digits into the November 1999 high at $48.00. It completed a double top at that level and broke down in the first quarter of 2000, entering a brutal decline that continued into 2003's 10-year low at $12.12. Many market analysts in that era thought the fast food business model had peaked, exposing the restaurateur to a long-term demise.

McDonald's stock bounced forcefully into the second half of the decade, completing a round trip into the 1999 high in 2007 and breaking out into 2008. It held up exceptionally well during the economic collapse, bouncing at new support in the low $50s. This resilience set the stage for market leadership beginning with a November 2009 breakout that stalled just above $100 in 2012. That psychological barrier held firm for nearly four years, finally yielding a 2015 breakout that has posted impressive gains into 2018. (For more, see: If You Had Invested Right After McDonald's IPO.)

MCD Short-Term Chart (2015 – 2018)

An October 2015 gap between $104 and $110 signaled the new trend advance, which stalled above $130 in May 2016. That gap remains unfilled more than two years later, as does the April 2017 gap between $135 and $138. While there is little risk that the lower gap will get filled in the coming year, the upper gap may generate a magnetic target when the stock enters an inevitable intermediate correction. 

A Fibonacci grid stretched across the multi-wave uptrend that started during the August 2015 mini flash crash places the May 2016 swing high and April 2017 breakaway gap right at the 50% level, raising the odds that it also denotes a continuation gap, marking the midpoint of an Elliott five-wave rally pattern. Additional upside toward $200 would negate this observation, which marks a potential top at the Dec. 18 all-time high just above $175.

On-balance volume (OBV) surged higher in the second half of 2016, peaking in July 2017 when the stock was trading near $155. It corrected with price into September and turned higher, stalling at the prior peak last month. This standoff may be instructive, telling us that institutions are withholding additional purchases despite the tax cut windfall. In turn, this waves another red flag, indicating that the long-term uptrend may be coming to an end.

The company reports fourth quarter earnings on Jan, 30, with that event offering a potential bearish catalyst. Market players should focus on the Dec. 22 low at $170.55 between now and then, with a breakdown setting off the monthly stochastics selling signal. The 50-day exponential moving average (EMA) has now aligned at this price level, presenting a short-term line in the sand that will measure bullish complacency following last year's outsized gains. (See also: McDonald's and Starbucks: A Case of Perception vs. Reality.)

The Bottom Line

McDonald's stock is waving red flags that could escalate into a full-blown correction in the coming weeks, but patience is required while the stock grinds through a relatively narrow trading range between $170 and $176. (For additional reading, check out: Who Are McDonald’s Main Competitors?)

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