broke out to an all-time high on Aug. 8, making it the second-strongest
. The rally was welcome news, as the stock had flirted with new highs since late 2007 but ran into
after each attempt to break free of gravity.
Fast-food stocks should do well during periods of economic weakness. It makes sense that penny-pinching consumers will eat more Big Macs and less steak in tough times, so joints that serve cheap food should offer relatively stable growth. However, McDonald's' long journey to new highs tells us that many folks remain skeptical about the sector.
Mickey D spiked up to a new high at $63.69 in December and pulled back in a deep correction that tested the August low. It bounced strongly in January and then stalled out three months later near $60. Price failed during nine attempts to break over this resistance level before the wide-range rally bar less than two weeks ago.
It's now pulling back in an orderly correction that should offer a second-chance opportunity to get onboard. I'd love to see the stock drop into breakout support near $61 but interested parties might need to settle for a higher entry because the pattern shows active buying interest on the downticks.
The breakout has improved the tone of buying interest in the restaurant sector. However, the hamburger giant is one of the few group names trading at new highs, so considerable challenges remain. With this admonition in mind, let's build a watch list of other eateries that could recover and move sharply higher in the months ahead.
Buffalo Wild Wings (BWLD)
Buffalo Wild Wings
owns nearly 500 chicken wingeries across the U.S. It had a fabulous run starting in 2006, rising from $15 to $50 in less than a year. The stock topped out in June of last year and entered a steady decline that accelerated to the downside between October and January.
The January low gave way to a series of higher highs and higher lows that remain intact, despite the July selloff. The stock is now trading at a nine-month high and is in the process of filling the big gap posted on Oct. 31. Look for back-and-fill action until this hole gets filled, but excellent progress so far points to an eventual rally into the $40s.
CEC Entertainment (CEC)
is the parent company of the Chuck E. Cheese pizza franchise. The weekly chart shows it posting twin highs near $43 in 2005 and 2007. A deep selloff erupted in July 2007 and dropped the stock to a four-year low, ahead of the January turnaround. Price surged higher after the bottom in a powerful V-shaped rally.
This is an excellent recovery pattern, with price testing the January low last month and bouncing strongly. However, the stock needs time to consolidate its recent gains, and a pullback to support at the 200-day moving average is likely in the next few weeks. That level could offer a low-risk entry for a recovery back to the historic highs in the $40s.
Darden Restaurants (DRI)
operates well-known eatery chains, including Red Lobster and Olive Garden. The stock sold off from $47 to $20 before bouncing with the broad market in January. The recovery attempt stalled out just above $37, which also marked the top of a Dec. 19 gap. It pulled back into mid-July and surged higher once again.
The stock tagged the recovery high last week and turned lower. If this pullback carves out a higher low, the next rally into resistance will complete a small-scale cup-and-handle breakout pattern. A buying spike over that level would trigger a buy signal for a continued uptrend that might reach the mid-$40s in the fourth quarter.
Yum! Brands (YUM)
feeds millions of hungry folks through its Pizza Hut, KFC and Taco Bell franchises. The stock posted an all-time high at $41.73 in April when it nosed above the October peak. Sellers then took control, knocking the wind out of the rally and dragging down price into the low $30s.
The stock bounced in mid-July, surging above a monthlong basing pattern and resistance at the 200-day moving average near $36. It's been testing new support for the last two weeks. If this level holds, the next leg up could challenge the 2008 high and set the stage for a long-term breakout.
As long as the economic climate remains uncertain, fast-food stocks should see strong buying interest. So check the menu and see if any of these tasty morsels is right for your portfolio.
Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.
At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.
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