Book profits on McDonald's (MCD) on strength up to its second half risky level at $223.83.
The fast food giant reports second-quarter results on July 26, and it missed earnings-per-share estimates when it issued first-quarter results on April 30. Before this miss, McDonald's had an 18-quarter winning streak. Time to lock-in long-term gains now!
McDonald's closed the first half of 2019 at $207.66 which became a key input to my proprietary analytics. The only level leftover from the first half is its annual value level at $177.99. The daily chart shows a "golden cross" and the weekly chart has been positive since the week of March 15 when the stock closed at $186.81.
The fast-food drive-thru restaurant chain specializes in hamburgers but has benefited from offering breakfast items 24/7 in many locations. Despite the earnings miss on April 30, shares of McDonald's continued higher to set their all-time intraday high of $213.01 on July 5. At Monday's close of $212.16, the stock is up 19.6% year to date and in bull market territory, 21.9% above its Dec. 26 low of $174.03. Some on Wall Street are worried about worldwide growth and the costs to revamping stores to energize sales. This may lead to announcement of cost controls. I have noticed that it has slipped in a few prices increases recently.
The Daily Chart for McDonalds
Courtesy of Refinitiv XENITH
McDonald's has been above a "golden cross" since Oct. 16, when the 50-day simple moving average rose above the 200-day simple moving average indicating that higher prices lie ahead. This was in play when the stock reached its all-time intraday high of $213.01 on July 5. The annual value level at $177.99 provided buying opportunities as a magnet between Jan. 4 and Feb. 15. The chart shows a pivot for July at $207.49 and a third quarter value level at $200.61. Above the chart is the second half 2019 risky level at $223.83.
The Weekly Chart for McDonald's
Courtesy of Refinitiv XENITH
The weekly chart for McDonald's is positive but overbought with the stock above its five-week modified moving average of $205.24. The stock is well above its 200-week simple moving average or "reversion to the mean" at $148.88 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 at 93.44 well above the overbought threshold of 80.00 and well 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 quarterly value level at $200.61 and reduce holdings with the stock between its monthly pivot at $207.49 and its semiannual risky level at $223.83.
Let's assume that you bought 100 shares at $100 per share ($10,000 investment) in August 2015. If you sell 50 shares at $212.00 you raise cash by $10,600 and still had $10,600 invested in the stock.
How to use my value levels and risky levels:
Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play. The weekly level changes each week. The monthly level was changed at the end of each month, the latest on June 28. The quarterly level was changed at the end of June. 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."
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.