McDonald’s Corporation (NYSE:MCD) turned 2017 into a banner year. Even with the recent giveback, MCD is still up 27%. But if you’re expecting a rosy forecast for the stock in the near-term, prepare for disappointment. The stock is beginning to falter, and signs of deterioration are starting to mount. So it’s time to temper expectations, play defense, and otherwise adopt a cautious stance.
MCD Stock Chart
On the charting front, I see three things that should concern MCD stock bulls.
First, the stock scored a failed breakout on Sept. 11. Failed patterns are a nasty sort, delivering pain and anguish to buyers who fell into the trap. The regret of bagholders increases the supply (or overhead resistance) for MCD making it that much harder for the stock to recover from its recent setback.
Second, MCD suffered a major breakdown yesterday, breaching pivotal support and the 50-day moving average. This marks the first time the golden arches have been beneath the 50-day since last November. It’s also the first time a short-term downtrend has materialized since then.
Third, distribution is on the rise. These high-volume down days suggest institutions are ringing the register. Rather than fight these kings of the jungle, I suggest joining them.
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At best, McDonald’s will be dead money for a spell. I see little reason for optimism, much less new bullish trades, until the stock can rise back above its 50-day moving average and return to an uptrend. At worst, MCD will see further downside as sellers press their advantage.
Make McDonald’s Pain your Gain
Throw it all together, and we have a decent setup for at least a neutral play in the stock. Sell the Nov $160/$165 bear call spread for $1 or better. Consider this a bet that MCD sits below $160 at expiration. If it does, you will capture the max reward of $1. The max loss (and cost) is $4.
To minimize the damage if the stock recovers from here, I suggest exiting on a break of resistance at $160.30. Because McDonald’s stock does have earnings before November expiration, you should consider taking profits if you can capture 50% of the potential profit (i.e., 50 cents).
Finally, since MCD is rising today, consider waiting until the stock rolls over to confirm its next down leg has begun.
As of this writing, Tyler Craig didn’t hold any positions in any of the aforementioned securities. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.
