McDonald's Stock Could Break Down in Coming Weeks

Dow component McDonald's Corporation (MCD) has struggled so far in 2018, falling more than 8% since the first trading day of January, in stark contrast to 2017's outstanding 41% return. The stock has had plenty of opportunity to attract committed buyers in recent weeks, with blue-chip indices probing all-time highs, but McDonald's has now turned tail and dropped to a multi-week low. This relative weakness shouldn't be ignored because it may foretell 20% to 30% downside into early 2019.

The stock is maintaining a delicate balance between bulls and bears, crisscrossing the horizontal 200-day exponential moving average (EMA) near $160 more than 30 times since February. A moving average rollover may be instructive in this bilateral scenario, predicting the start of an active downtrend. With this in mind, shareholders and short sellers should keep close watch on this battleground, waiting for the standoff to come to an end with a decline that undercuts $150. (See also: McDonald's Stock Struggling at Support After Earnings.)

MCD Long-Term Chart (1999 – 2018)

The stock broke out above the 1987 high at $7.64 in 1990, entering a powerful trend advance that continued through the decade, finally topping out at $47.38 in March 1999. It pulled back and tested that level in November, reversing two points above the prior high and breaking double top support in January 2000. The subsequent decline relinquished points at a rapid pace, reaching a nine-year low at $12.12 in March 2003.

That print marked a historic buying opportunity, presaging a V-shaped recovery wave that reached the prior peak in May 2007. The stock broke out immediately but ran into a buzzsaw of cross-currents a few months later, carving a diamond pattern while broad benchmarks spiraled into the 2008 market crash. This relative strength set the stage for a 2010 breakout to an all-time high when the majority of the stock universe was still struggling to find its footing.

The rally ended just above $100 in 2012, giving way to a sideways pattern that persisted into a 2015 breakout. The subsequent uptick carved a healthy series of higher highs and higher lows into January 2018, posting an all-time high at $178.70, ahead of a steep downturn that reached $146.84 in early March. The stock has traded within the January to March range for the past six months, showing little inclination to turn higher and break out or turn lower and break down. 

The monthly stochastics oscillator crossed into a sell cycle in February 2018 and surged lower into April. The indicator then flattened into a sideways pattern (black ellipse), failing to reach the oversold level into September. This omission keeps bears in control under the surface, telling market players to watch for a downswing that finally reaches the oversold line because it could also foretell a range breakdown. (For more, see: Behind McDonald's 283% Rise in 10 Years.)

MCD Short-Term Chart (2017 – 2018)

A Fibonacci grid stretched across the 2018 trading range highlights months of price action stuck between the .382 and .618 retracement levels. The 200-day EMA settled at the .382 level in March, while the descending 50-day EMA reached alignment in July. This tight coordination is unlikely to persist through the fourth quarter, suggesting that the stock is getting close to a sizable trend wave.

On-balance volume (OBV) suggests a bearish outcome, crawling sideways during the mid-summer months and descending to a six-month low this week (red line). This distribution tells us that shareholders are growing impatient, dumping positions to free up capital for more profitable opportunities. In turn, this exodus could generate a progressive feedback loop, finally breaking the March 2018 low. (See also: Uncover Market Sentiment With On-Balance Volume.)

The Bottom Line

Bears may be winning a multi-month standoff, dropping the fast food giant's stock through $150, ahead of a decline that reaches 50-month EMA support in the $130s. (For additional reading, check out: How McDonald's Makes Its Money.)

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