McDonald's Restructuring Plan Triggers Breakout

Dow component McDonald's Corporation (MCD) rallied more than 4% to a four-month high on Thursday after The Wall Street Journal reported that the fast food giant would shrink its corporate structure and lay off an undisclosed number of employees. The news follows a previously announced initiative to cut $500 million in "targeted costs" by the end of 2019. More details are expected at the company's June 12 town hall meeting.

The belt-tightening news triggered intense buying pressure, lifting the stock above stubborn resistance in the mid-$160s while setting the stage for a test at January's bull market and all-time high in the upper $170s. The classic inverse head and shoulders breakout bodes well for shareholders through the rest of 2018 and into the next decade, raising the odds for an uptrend into the $200 to $225 price zone. (See also: How McDonald's Makes Its Money.)

MCD Long-Term Chart (2008 – 2018)

A four-year uptrend stalled just above $100 in the first quarter of 2012, giving way to a decline that found support at $87.07 more than 10 months later. The stock traded within those range boundaries for the next four years, finally breaking out in October 2015. That impulse stalled at $132 in May 2016, while a pullback into breakout support offered a low-risk buying opportunity ahead of a secondary advance in April 2017.

The stock soared into year end, posting a 41% annual return, and stretched another six points into January's all-time high at $178.70. The broad downturn into February shaved 25 points off that number, while a secondary decline into March relinquished another eight points. Price action into June carved a broad basing pattern, with resistance in the mid-$160s triggering multiple bear raids ahead of this week's high-volume breakout.

The monthly stochastics oscillator crossed into a sell cycle in February 2018, reaching the lower half of the panel in April and crossing into a bull cycle one month later. This turnaround marked the first time a long-term sell cycle failed to reach the oversold level since 2016, highlighting growing relative strength. The weekly oscillator is still engaged in a bear cycle that started last month, raising the odds for a pullback that tests new support.

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MCD Short-Term Chart (2017 – 2018)

The vertical decline into February 2018 found support at the .382 Fibonacci rally retracement level, while the subsequent recovery wave stalled at the 50% sell-off retracement level near $162. Resistance lifted slowly toward the .618 retracement at $167 between March and May, establishing two horizontal lines that completed twin necklines of an inverse head and shoulders basing pattern.

Stair-step price action between harmonic levels in the $160s carved a rising highs trendline (red line) with resistance at the top of this week's rally wave, predicting a reversal around $170. In turn, that could generate a fruitful test at new support, targeting the gap between $162.50 and $163.50. A gap fill would mark a low-risk buying opportunity in this scenario, ahead of a potentially stronger assault on first quarter price levels.

On-balance volume (OBV) topped out in July 2017 and failed to break out during the strong uptrend into January 2018, generating a bearish divergence. Committed buyers returned in March, lifting the indicator to the highest high so far this decade, at the same time that price was trading more than 15 points under the January high. This positive imbalance has set off a strongly bullish divergence, predicting that price will play catch-up in the coming months. (To learn more, see: Uncover Market Sentiment With On-Balance Volume.)

The Bottom Line

McDonald's stock charged out of a four-month basing pattern this week in reaction to news about a corporate restructuring effort that is intended to reduce costs. A pullback into the lower to mid-$160s should offer a buying opportunity ahead of a test at the bull market high. (For additional reading, check out: Goldman Sachs Adds McDonald's to Conviction List.)

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

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