Shares of McDonald's (MCD) - Get Report bounced off their 200-day moving average this month. But the fade in Tuesday's session may be signaling the start of a second phase in the primary pullback that began in late December.
The stock rallied more than 50% from its October 2015 low to its May 2016 high, and then retraced 38% of that move to its October 2016 low. A second rally attempt stalled at the end of last year in the vicinity of the downtrend line drawn off the 2016 highs and at a 62% Fibonacci arc.
These Fibonacci levels are measured using a base line -- in this case, the peak to trough of the 2016 range and then drawing arcs at the Fibonacci ratios along this line. They can be used to anticipate levels of support and resistance, and a bearish reversal pattern formed in this particular arc area.
A large white candle formed, which was followed by a narrow opening and closing range doji candle, and then a large dark candle. This three-period bearish reversal pattern is called an eveningstar and represents a transition in trader sentiment from bullishness to bearishness. It is often seen at market tops.
The stochastic oscillator on this time frame is rolling over in an overbought condition and positive money flow has been declining for the last year.
On the daily time frame, the November rally stalled just before closing the July 2016 gap. Then the stock pulled back to an intersection of the 50- and 200-day moving averages and a 38% retracement of the two month run. Moving average convergence/divergence has made a bearish crossover, and the relative strength index dropped below its center line. The accumulation/distribution line has moved below its signal line. Chaikin money flow is reflecting selling pressure.
These price and money flow momentum indicators remain negative despite the recent bounce off reinforced resistance in the $118.50 area.
In Tuesday's session, the broader market rallied in the last two hours of trading, but that was not the case with McDonald's shares. They gapped higher on the open and then faded into the close, forming a small doji star candle on the chart, suggesting another failed attempt at a new high and the potential for a pullback to the daily 38% retracement level in the $110 area, and potentially the 38% weekly retracement level in the $110 area.
The stock is a good risk/reward speculative short at this point, using a percentage buy-to-cover stop above Tuesday's doji high, and trailing that stop down as the trade develops.
This article is commentary by an independent contributor. At the time of publication, the author was short MCD.