Dow component McDonald's Corporation (MCD) is carving the final stage of a bottoming pattern that could generate a strong second quarter recovery wave. With a little luck, a breakout will reach and exceed January's all-time high, entering a trend advance that lifts the fast food giant's shares above $200. That would bode well for other multinationals buffeted by trade war fears in the past two months.
Mickey D. has a long-observed tendency to shake off broad market swings and go its own way, with price action during the 2008 economic collapse offering the most striking example. It outperformed nearly all Dow stocks after hitting a 17-month low in October of that year, hitting new highs by the turn of the decade. This maverick behavior could come in handy in 2018, with the Market Volatility Index (VIX) posting the highest highs in nearly three years.
Informed market players will be watching short-term price action and long-term stochastics cycles in the coming weeks, waiting for the stock to complete the first sell cycle since November 2016. A rally above $166 would indicate that bulls are back in control, while the company's April 30 earnings report could align with a stochastics crossover, issuing the most potent buying signals in several years. (See also: How McDonald's Makes Its Money.)
MCD Long-Term Chart (1999 – 2018)
A multi-decade uptrend ended at $49.56 in the fourth quarter of 1999, giving way to a decline that posted a nine-year low in the low teens in March 2003. The stock underperformed during the mid-decade bull market, crawling higher in a slow-motion bounce that finally reached the prior high in April 2007. It broke out immediately, lifting into the low $60s, where aggressive sellers triggered a major reversal, dropping the stock into a diamond pattern that posted a deep low at $45.79 in October 2008.
Buyers returned in force in the second half of 2009, lifting the stock into a strong uptrend that posted a long series of new highs into 2012, when the rally ended just above $100. It took four years to clear that barrier, setting off a 2016 trend wave that booked exceptional returns into January 2018's all-time high at $178.70. The stock then fell off a cliff with other multinationals, losing more than 30 points in reaction to trade war fears.
The monthly stochastics oscillator rolled into a long-term sell cycle in reaction to the first quarter decline and has now surged through the panel's midpoint. This bearish cycle could easily remain in force until the indicator reaches the deep lows posted in 2012, 2014 and 2016 (blue line). Fortunately for bulls, that could happen in just a few weeks, given the downward trajectory in the past two months. (For more, see: Why McDonald's Oversold Stock Still Looks Expensive.)
MCD Short-Term Chart (2016 – 2018)
The post-election rally cleared May 2016 resistance with an April 2017 breakaway gap between $135 and $137. That big hole remains unfilled, offering a downside target if bears break the February 2018 low at $146.84. Meanwhile, price action since early February has carved an inverse head and shoulders basing pattern on top of the 200-day exponential moving average (EMA), issuing a possible buy signal when price action pierced neckline resistance at $161 last week. However, it is still testing that level, which has narrowly aligned with the 50-day EMA.
On-balance volume (OBV) has ticked higher in a solid uptrend for more than a decade, with a continuous supply of institutional capital taking long positions. It dropped to a four-month low in February, but aggressive buyers stepped in quickly, lifting the indicator to a new high, even though the stock is trading nearly 20 points below the January high. This bodes well for bulls in coming weeks.
The Bottom Line
McDonald's stock may complete a bottoming pattern and breakout that sets the stage for a fresh advance to all-time highs. (For additional reading, check out: Why Dow Laggard Is Poised to Outperform.)
<Disclosure: The author held no positions in aforementioned securities at the time of publication.>