McDonald’s Corporation (NYSE:MCD) enjoyed something of a renaissance year in 2015, strongly outperforming the S&P 500. Sadly, the going for MCD stock has been much more challenging in 2016.
In fact, the price action in McDonald’s coupled with observations in momentum increasingly say that the stock has topped out, and that it could be in the early stages of what could amount to another 10% slide from last Friday’s closing levels.
Active investors and traders could look to pounce on this opportunity to play a mean-reversion trade to the downside in MCD stock.
As we all witnessed, 2015 was a year of stock market churning, and the initial spike in volatility during the August/September period ultimately began to manifest more clearly to the rest of the investing public as 2016 arrived. While much of the broader stock market was already well in correction territory by the third quarter of 2015, a few heavily weighted stocks with believable growth stories continued to push higher.
Most prominently represented in this group were the “FANG” stocks such as Amazon.com, Inc. (NASDAQ:AMZN). However, McDonald’s was also firmly planted in this group as its “reorganization” story was both well-known and showing signs of working, thus leaving fund managers and investors alike little choice but to pile in and chase the stock higher.
Ultimately, however, economic gravity keeps just about all stocks from rising to infinity, and now MCD shares look notably vulnerable.
MCD Stock Charts
On the multiyear weekly chart, we see that when MCD stock gapped higher and subsequently broke past horizontal resistance in October, upside momentum quickly began to wane. Particularly, the higher high in early February 2016 clearly came on a lower high in the Relative Strength Index (RSI) at the bottom of the chart.
Very simply, the rate of change off the stock’s August 2015 lows was too steep to sustain. While the October 2015 breakout still looks to have been an important longer-term milestone for MCD, at the very least, a retest of this breakout area in the low $100s looks probable. This would have a cooling effect on McDonald’s, but also would reset the stock for potential additional gains later in 2016 or 2017.
On the daily chart, we see that as MCD began losing upside momentum, the price action since last December has formed a bearish head-and-shoulders pattern. The late-January/early-February surge in the stock served as the last hurrah and thus built the “head” of this formation.
The horizontal neckline sits around the $114-$115 area, and a break and hold below there would be a confirmation that the stock is likely on its way toward the $100 area and toward filling the October up-gap, which I marked with the blue box.
Less risk-averse active investors could already begin to build a short position in the stock or options market at current levels. As long as the early-February highs don’t get violated, this trade setup on MCD stock should remain valid.
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