Wait for a Pullback in MCD

by Tyler Craig | December 10, 2012 11:33 am

After reporting its first decline in same-store sales in nearly a decade[1] for October, McDonald’s (NYSE:MCD[2]) bounced back with an upside surprise[3] in November’s sales figures. Blowing past analysts’ expectations of a tepid 0.2% gain, McDonald’s increased sales an impressive 2.4% in November on the heels of rising demand for the chain’s tasty new Cheddar Bacon Onion sandwich.

The positive surprise led shares of the ubiquitous fast-food chain to gap higher 1.7% in early trading on Monday. But rather than scooping up shares of MCD in response to one positive data point, traders ought to consider the posture of its price chart and whether this morning’s pop provides an entry point of low risk and high reward.

MCD Daily
Click to Enlarge

This year hasn’t exactly been a banner one for the golden arches. While the Dow Jones Industrial Average (of which MCD is a card-carrying member) is up 8.3% on the year, MCD is down roughly 11%. Its notable underperformance is revealed clearly in the declining Comparative Relative Strength study (green line) in the accompanying price chart.

And yet, despite the relative weakness plaguing the stock over the year, a few positive developments have arisen in recent months. The stock price has formed an inverted head-and-shoulders pattern that very well may have hammered out an intermediate low in MCD. What’s more, the bullish reversal of fortune was enough to launch the beleaguered stock back above its 50-day moving average — a development that will bode well … if it can hold.

The primary problem with piling into MCD today is that it’s a long way off support and is gapping into a potential resistance level at $90. Furthermore, the response to this morning’s up-gap has been far from inspiring. At the time of this writing MCD was trading well off its highs. A multiday pullback would provide a much better risk/reward entry than is available at current levels.

Traders looking for bullish exposure to MCD could consider buying bull call spreads after MCD completes some type of pullback or consolidation. You could buy the March 87.50-92.50 call spread for $2.30. The max risk is limited to the initial $2.30 paid and will be incurred if MCD sits below $87.50 at March expiration. The max reward is capped at $2.70 and will be captured if MCD rises above $92.50 by March expiration. By going out to March, traders give MCD plenty of time to complete its reversal back into an uptrend.

At the time of this writing Tyler Craig had no positions in any of the aforementioned names.

  1. its first decline in same-store sales in nearly a decade: https://investorplace.com/2012/11/a-surprising-fall-for-mcdonalds-global-sales/
  2. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  3. upside surprise: https://investorplace.com/2012/12/mcdonalds-november-sales-top-forecasts/

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