The Wendy's Company (WEN) shares sold off more than 10% on Tuesday after the fast food giant announced that it will launch a "quick service" breakfast menu in 2020. Dow component and competitor McDonald's Corporation (MCD) lost nearly 4%, with the catalyst providing a convenient excuse for shareholders to take profits after a 30% rally. Higher-than-average sell-off volume predicts even lower lows before these popular restaurant chains offer low-risk buying opportunities.

The $20 million investment needed to launch the breakfast program will lower Wendy's 2020 earnings per share (EPS) guidance, but the initiative isn't likely to alter a fast food breakfast landscape dominated by Mickey D's since the wildly successful introduction of the all-day breakfast menu in 2015. In addition, this will mark Wendy's fourth attempt to build market share in a venue that's now saturated with consumer choices.

Shareholders must have mixed feelings about the announcement because Wendy's stock just posted an all-time high at $22.84. In addition, Tuesday's gap failed a healthy breakout above channel resistance going back to January 2018. And unfortunately, the timing was terrible because the rally peak was just 42 cents above the 2007 high, with the downturn reinstating long-term resistance that could eventually signal a major top. 

Wendy's Long-Term Chart (1993 – 2019)

Long-term chart showing the share price performance of The Wendy's Company (WEN)

A multi-year uptrend ended just above $10 in 1993, giving way to a deep slide that found support near $3.00 in 1996. The subsequent uptick took seven years to complete a round trip into the prior high, yielding an immediate breakout and rally that reached $22.42 in 2007. The stock got pummeled during the 2008 economic collapse, undercutting the 1995 low at $2.80 in November, ahead of narrow sideways action into 2013.

The stock has stair-stepped higher in the past six years, with the uptick pausing in 2015 and resuming after the 2016 presidential election. Price action eased into a rising channel in May 2017 and stayed within those boundaries until an August 2019 breakout that posted healthy buying volume. This week's decline has violated new support, signaling a failed breakout that exposes a trip into the channel's bottom near $16.50.

A Fibonacci grid stretched across the 10-year uptrend places channel support close to the rising 50-month exponential moving average (EMA), reinforcing support in the mid-teens. The 200-month EMA has narrowly aligned with the 1993 rally peak, which cuts across the .618 retracement level. In turn, this establishes a long-term downside target if the breakfast initiative crashes and burns in the next few years.

McDonald's Long-Term Chart (1999 – 2019)

Long-term chart showing the share price performance of McDonald's Corporation (MCD)

A multi-year uptrend topped out near $50 in 1999, establishing a resistance level that wasn't mounted until a 2007 breakout that reached the lower $60s in the summer of 2008. The stock held up well during the bear market, with economic headwinds favoring fast food over fancy restaurants. That resilience set the stage for superior gains through most of the 10-year bull market, with price action since 2016 constrained within a rising channel.

The monthly stochastics oscillator lifted into the overbought zone in April 2019 and crossed into a sell cycle this week, predicting at least six to nine months of relative weakness. It's also engaged in the fifth wave of an Elliott five-wave pattern that could post a final buying spike above $250. However, the reversal unfolded at three-year channel resistance, also predicting an intermediate correction that could reach channel support. As a result, this looks a perfect time for short-term market players to take profits while long-term shareholders sit back and enjoy the ride,

The Bottom Line

Wendy's stock sold off after the company announced it will reenter the fast food breakfast wars with an expensive initiative that will lower 2020 guidance. McDonald's stock sold off as well, but this market leader may eventually post new highs.

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