Investors gorging themselves on McDonald’s Corporation (NYSE:MCD) shares are finally suffering some indigestion. Since peaking at $178.70 in late-January, MCD stock has fallen 15.5% amid heavy profit-taking.
The slide, while disappointing, was inevitable. The golden arches have defied gravity for far too long, making them ripe for an upset.
The catalyst for MCD’s reversal of fortune arrived in the form of a disappointing earnings release. As is often the case for a large-cap that has doubled in value over a few short years, McDonald’s shares were pricing in perfection. And last quarter’s growth missed the lofty mark. Spectators hoping that this will be a quick correction best settle in. Given the many support levels that have been breached, MCD stock is likely to remain under pressure for a while.
Last Friday’s plunge worsened the technical posture by carrying McDonald’s stock deep beneath the 200-day moving average. The 20-day and 50-day are hurdling lower and likely to provide resistance on any future re-tests. The $155 level was valiantly giving support, but ultimately failed with last week’s down-gap. We want to be sellers of any and all rallies toward that zone.
Part of the problem with McDonald’s meteoric ascent (particularly the launch from $130 to $150, is it left little by way of potential support along the way. That means things could get very dicey if MCD slips below last week’s low ($147).
In sum, bears have wrested control, and until we see a definitive bottoming pattern emerge, you should view rallies in the stock as opportunities to deploy bearish trades.
MCD Stock: The Bears Are Calling
Implied volatility is elevated, which suggests short premium plays are the way to go. To create a high probability of profit, sell the Apr $160/$165 bear call spread for 66 cents. The reward is limited to the initial credit, and the risk is $4.34. You could scale in to further increase your odds. That is, enter half now at a 66 cent credit, and then wait until the spread value rises towards 96 cents before entering the second half.
That will increase your average credit and allow you to capitalize on any further rallying in MCD stock over the near-term.
As of this writing, Tyler Craig didn’t hold positions on any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.