Take Some Profits In McDonald’s Corporation (MCD) Stock

McDonald’s Corporation (NYSE:MCD) stock has surged nearly 30% this year, and with Tuesday’s 1.11% lift, MCD stock has reached my near- to medium-term price target of $120.

Beat the BellTo be sure, McDonald’s stock continues to be supported by several factors, including a turnaround story that is believable and visible … as well as a somewhat defensive nature of its business. However, for the near-term, MCD shares look overbought — and active investors and traders should be taking profits and rebuying on dips.

I last discussed McDonald’s stock on Oct. 15, and said that the still-negative public view of the restaurant chain also was reflected in investor pessimism on the stock, and didn’t reflect the realities of a turnaround plan that was well on its way and working well. From a new and better tasting menu to operational upgrades, McDonald’s implemented big and noticeable changes in 2015 — and I see this continuing to act as tailwind for MCD stock going forward.

All in all, I’m pretty bullish — on McDonald’s as a company, its turnaround story and how it fits into a slower-economic-growth environment.

However …

As a risk manager, I also like to take at least partial profits in stocks when a) my near- to medium-term price targets are met, and b) overbought technical readings become severe. All of this will allow me to put capital back to work in the stock at lower prices.

On Tuesday, Dec. 29, McDonald’s stock reached the price target I laid out on Oct. 15. So, sticking to my game plan, I’m taking partial profits.

McDonald’s Stock Charts

Looking at the longer-term charts of MCD stock, we see that the breakout that I saw looming in my missive on Oct. 15 has indeed taken place. The rally has been ferocious; part of the reason for the severity of the rally was momentum and underperforming fund managers having to buy any stocks that actually rose in 2015 (which really wasn’t all that many).

Through this lens, Mickey D’s should have plenty higher to go, which over the coming year or two could see the stock move into the mid- to high $100s.

McDonald's stock chart weekly
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If we zoom in on the daily chart, however, we start to see that while my $120 target has now been met, the going looks increasingly stretched to the upside.

While some immediate-term overshooting higher is always possible, the rising wedge pattern coupled with a monthlong overbought reading in the Stochastic oscillator is not where I want to buy stocks. MCD stock is also increasingly decoupling from its 100- and 200-day moving averages and through a multiweek/month lens, some mean reversion (or sideways consolidation at the very least) looks necessary.

McDonald's stock chart daily
Click to Enlarge

Active investors could look to re-buy the stock in the $110-$112 area, upon confirmation of a bullish reversal.

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