MCD Earnings Preview: Should You Bet on the Burger Wars?

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Shares of McDonald’s Corporation (NYSE:MCD) are on the verge of a major move, as earnings are due to be released on April 22. This could be the catalyst that drives shares to fresh 52-week peaks north of $103 or pushes MCD lower towards $90.

mcdonald's-mcd-stock ko stock yum stockOn a technical level, a “symmetrical triangle” has formed, which usually indicates that a major move is forthcoming. At current levels, I’m pricing in a possible $5-$6 move in the stock, and this would get the aforementioned price targets of $103 or $90 in play.

These types of pattern setups usually follow through with the current trend, which has me leaning towards a run past triple-digits for the stock.

The company is well known for its “golden arches,” but another bullish development is the formation of the “golden crosses” on the chart. These occur when either the 50- or 100-day moving average crosses above the 200-day moving average.

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As you can see, this setup transpired in mid-March in the $93.50-$94 area, with shares making a run at $100 shortly afterwards. The 50-day moving average is also in a rising uptrend and has held since early February, which is another bullish sign.

Sentiment is bearish on the stock, as the company is shuffling in a new CEO, Steve Easterbrook, and a menu shakeup. Trust and ingredients are in focus these days, and McDonald’s has much to prove and change with the younger generation.

Analysts are expecting McDonald’s to earn $1.07 a share on revenue of $6 billion, with most leaning towards an earnings shortfall. The company has missed Wall Street’s estimates in the past four quarters, so it’s hard to blame them. This will also be the quarter of “transition,” so the new CEO could “kitchen sink” the numbers and set a really low bar for the rest of 2015.

With so many knuckleheads leaning to one side of the boat, any upside surprise will quickly have them running back to the bullish side. I have looked at the May $100 calls as a possible countertrend trade, but I have usually played MCD to the downside over the years.

As a trader, the technical setup looks promising, but the fundamentals are deteriorating. If shares do challenge $103 and fresh 52-week peaks, the aforementioned call options will easily double.

On the flip side, I also peeked at the MCD May $95 puts as a possible way to play a pending breakdown to the low $90s. If shares of MCD trade down to $92.70 or lower by mid-May, these options would also double from current levels.

The May $100 calls and the May $95 puts together would also create a strangle option trade, otherwise known as a “chicken trade.” Option traders use these types of strategies because they don’t know where shares could trade after earnings are released, but they are still expecting a major move.

At last check, both options together would cost roughly $2.25. The trade would make a profit if shares of MCD are above $102.25, technically, or below $92.75 by mid-May.

Given both option premiums are above $1, I will likely sit on the sidelines when MCD announces its numbers. Although I’m more bullish than bearish on the shares, the risk/reward isn’t there for me to risk this much premium. I usually like to trade earnings with options that cost less than $1 and on better setups in which both the fundamentals and chart work align.

I will track these possible option trades into MCD’s earnings to see how things go, but there will be better setups than betting on the burger wars.

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