McDonald's (MCD) - Get Report shares has rallied sharply since the stock market's mini-crash in August, but detailed technical analysis shows that their run is likely over, and that they're headed for a dramatic selloff. The stock's rise from its August low of $87.50 to current levels around $120 appears to have completed a classic Elliott Wave impulsive thrust that should complete the longer-term rally from the 1987 Black Monday Crash.
Above is the weekly bar chart of the company's stock behavior since early 2013. It shows the sideways consolidation in the yellow box. That ended with the August mini-crash, when McDonald's stock slumped but failed to break the strong support that had been established over the previous 30 months. Then, ending that entire corrective phase, the stock exploded higher in a predictive pattern that is often seen at the terminal part of a large uptrend. This is labeled with purple 1 through 5, with wave 3 subdividing into blue i through v, and comprising all of wave blue (5), which ends wave purple 1-circled.
The red sell box marks the end of the recent rally. It also marks a reversal in trend from the amazing upward move of the past three decades. Now is the time to take protective action. If you're long shares of McDonald's, you should place sell stops at the $113 level, which is the swing reversal point since the mid-January bottom of wave purple 4. If the stock closes below $113, it will begin a multimonth slide toward the $90s. The stochastics, which are now exiting extreme overbought conditions near 97%, are positioned for a decline that should take them into the oversold extreme near the 10% threshold, which will weigh upon prices for the next few months.
In addition, the stock's test of $122 failed to allow it to close above the upper two-standard-deviation band, which contains 95% of normality. Our objective decision support engine uses indicators like this to filter historical cause/effect correlations, and it warns when a cause is likely to predict an effect.
The decision support engine also searches for historical patterns. Right now, it's on alert for a pattern in which the rise of the past few months reverses and heads to the zone of the past correction: the yellow box that includes the $93 +/-$7 zone. These are just a couple of the decision support engine's indicators that are predicting a selloff in McDonald's stock.
This second chart is the monthly bar chart, which puts the weekly chart into long-term perspective. The blue arrow shows the path that the stock's price could take. The low $90s is the initial target, but the stock's final decline could be all the way toward $60 +/- $15. Although this could take a couple of years, the risk is severe enough that the $113 level must be used to protect long exposure, as buying and holding at these all-time highs is simply not indicated.
Notice the unidirectional power of the stock's uptrend, which has kept monthly stochastics from approaching the oversold 10% extreme for decades. This won't hold as the stock begins along the path shown by the blue arrows. Sooner than later, (as Ralph Elliott taught) some news will arrive to justify the decision support engine's forecast, and it will be too late to sell your shares in the triple digits. Therefore, $113 remains the critical line in the sand for those holding the stock.
Interested in this kind of market analysis? Sign up today for a FREE 7-day trial of our Decision Support Engine Premium Service at no obligation. Inquire about special pricing for TheStreet.com readers after your complimentary trial.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.