McDonald's (MCD) - Get Report missed third-quarter earnings estimates on Tuesday, extending a losing streak to three quarters in a row. U.S. same-store sales slowed in the quarter. I show risk to its 200-day simple moving average at $199.54 as the stock closed Monday below its quarterly pivot at $211.55. Another warning came from its weekly chart, which is negative.
The stock is trading below its five-week modified moving average at $211.17 with its weekly slow stochastic reading declining since the week of Sept. 13, which defines a negative weekly chart. The stock set its all-time intraday high of $221.93 on Aug. 9 after the stock became an "inflating parabolic bubble" as its weekly stochastic reading was above the 90.00 threshold on a scale of 00.00 to 100.00. At the high the stock was below its semiannual risky level at $223.83.
McDonald's doesn't have a positive fundamental backdrop as its P/E multiple is elevated at 26.59 with a dividend yield of 2.23%, according to Macrotrends.
Even with near-term downside risk the stock is up 18.2% year to date and in bull market territory 37% above its low on Aug. 2, 2018, of $153.13. Since the $221.93 high the stock is down 5.4%.
The Daily Chart for McDonald's
Courtesy of Refinitiv XENITH
McDonald's has been above a "golden cross" since Oct. 16, 2018, when the 50-day simple moving average rose above the 200-day simple moving average indicating that higher prices lie ahead. This signal was in play when the stock reached its all-time intraday high of $221.93 on Aug. 9. The stock ended 2018 at $177.07 which was an important input to my proprietary analytics and its annual value level at $177.99 provided buying opportunities as a magnet between Jan. 4 and Feb. 15. The mid-year close at $207.66 was another important input to my analytics and its second half risky level at $223.83 was nearly tested at the Aug. 9 high. The stock closed Sept. 30 at $214.71 which was input to my analytics and resulted in the fourth-quarter pivot at $211.55. The stock closed below this level on Monday as a technical warning. The 200-day simple moving average is $199.54.
The Weekly Chart for McDonald's
Courtesy of Refinitiv XENITH
The weekly chart for McDonald's is negative with the stock below its five-week modified moving average of $210.01. The stock is well above its 200-week simple moving average or "reversion to the mean" at $156.66 last tested during the week of Sept. 11, 2015 when the average was $95.65. The 12x3x3 weekly slow stochastic reading is projected to end this week declining to 30.61 down from 37.17 on Oct. 18. Before reaching its all-time high on Aug. 9, this reading was above the 90.00 threshold as an "inflating parabolic bubble" which warns of downside risk of 10% to 20%.
Trading Strategy: Buy weakness to its 200-day simple moving average at $199.54 and reduce holdings on strength to its quarterly pivot at $211.55 and its semiannual risky level at $223.83.
Don't Let This Market Haunt You - Join Jim Cramer's Club for Investors and Save
Get 57% off on your membership to Jim's Action Alerts PLUS club for investors during our Halloween sale.
How to use my value levels and risky levels:
Value levels and risky levels are based upon the last nine monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31, 2018. The original annual level remains in play.
The close at the end of June 2019 established new monthly, quarterly and semiannual levels. The semiannual level for the second half of 2019 remains in play.
The quarterly level changes after the end of each quarter so the close on Sept. 30 established the level for the fourth quarter. The close on Sept. 30 also established the monthly level for October as monthly levels change at the end of each month.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.
To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.
How to use 12x3x3 Weekly Slow Stochastic Readings:
My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble" as a bubble always pops. I also call a reading below 10.00 as being "too cheap to ignore."
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.