Fast food stocks have struggled in recent months, underpinned by a McDonald's Corporation (MCD) pullback that has accelerated into a full-blown correction after the weekend departure of CEO Steve Easterbrook. Rival Yum! Brands, Inc. (YUM) has also been slumping badly, dumping off more than 6% in a single session last week after missing third quarter profit estimates due to zero growth at Pizza Hut.

However, it isn't all dark and dreary in the restaurant sector because smaller rivals that include Shake Shack Inc. (SHAK) could reward shareholders in coming months. The company's domestic focus is a major benefit at this time, with currency headwinds and over-saturation affecting the handful of international players. More importantly, Shake Shack stock could rally after Monday's post-market earnings report and begin a rapid advance toward September's all-time high.

Wall Street analysts expect the New York-based chain to report profit per share of $0.21 on third quarter revenue of $157.45 million. The stock shook off weak guidance during the second quarter report in August and headed for the stars, lifting more than 40% into September's all-time high at $106. It retraced more than two-thirds of those gains into November, working off an overbought technical reading while raising the odds for substantially higher prices if the company beats expectations.

Coverage has been light since the last report, with a Hold rating at Deutsche Bank the only major call from an investment house. Although market watchers have grown more cautious about the sector, they could make an exception for the wildly popular hamburger chain due to a 30% increase in first half revenue and an aggressive store opening schedule that should build on those metrics well into 2020. On the flip side, roll-out delays or cutbacks probably won't be well received by the trading crowd.

SHAK Long-Term Chart (2015 – 2019)

Long-term chart showing the share price performance of Shake Shack Inc. (SHAK) 

The company came public at $47 in January 2015 and settled in the upper $30s in February. The subsequent uptick posted a new high in April, setting off a powerful trend advance that stalled under $100 in May. Aggressive sellers then took control, grinding out a downtrend that found support at $30 in the first quarter of 2016, while two retests into the second half of 2017 failed to stir buying interest.

Sentiment improved in the fourth quarter of 2017, generating a healthy uptrend that completed three rally legs into the 2015 high in August 2019. The stock broke out immediately, lifting to $105 and turning tail, failing the breakout in late September. It continued to lose ground in October, but relative strength readings are finally hitting oversold levels, raising the odds that the intermediate correction will soon come to an end. 

SHAK Short-Term Chart (2018 – 2019)

Short-term chart showing the share price performance of Shake Shack Inc. (SHAK)

The on-balance volume (OBV) accumulation-distribution indicator posted a new high in the first half of 2018 and stalled, carving a narrow consolidation pattern that broke to the upside in August 2019. OBV posted an all-time high two weeks later and turned lower in an orderly distribution phase that is holding well above the prior peak. This looks like garden variety profit taking in a leadership stock, which could soon break out into the triple digits.

The decline has now settled at the .382 Fibonacci rally retracement level in the lower $80s. An earnings miss could drop price through this support and into the 200-day exponential moving average (EMA) and rising trendline in the mid- to upper $70s. Watch the $90 level if buyers take control after the news because short sellers will be reloading positions at that level. The most important level to watch if the rally continues is $96 because that's the location of September's failed breakout.

The Bottom Line

Shake Shack will report earnings in Monday's post-market after a two-and-a-half-month correction that has dropped technical readings to oversold levels. An upbeat report could end the downside and set the stage for new highs in the coming months.

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