McDonald’s Beat Pushes Stock Into Overbought Territory

McDonald’s Corporation (MCD) beat estimates when it released its latest earnings report on Jan. 29. This snapped a three-quarter losing streak. The stock ended last week above its semiannual pivot at $216.19, with its weekly risky level at $222.53.

McDonald’s has survived the adverse effects of the spreading of the coronavirus. Only 3% of its revenue come from China. The stock does not have a positive fundamental backdrop, however. Its P/E ratio is elevated at 27.66, with a dividend yield of 2.30%, according to Macrotrends.

The stock closed last week at $217.09, up 9.9% year to date and in bull market territory at 21.8% above its 52-week low of $178.27 set on March 8, 2019. In the longer term, the stock is consolidating a bull market run of 31% from its low posted on Dec. 26, 2018, to its all-time intraday high of $221.93 set on Aug. 9, 2019. This was followed by a correction of 15.5% to a low of $187.55 on Nov. 4, 2019.

The daily chart for McDonald’s

Refinitiv XENITH

McDonald’s had 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 would follow. This signal was in play when the stock reached its all-time intraday high of $221.93 on Aug. 9. A negative reaction to earnings on Oct. 22 ended this positive signal as the stock broke below its 200-day simple moving average.

McDonald’s shares ended 2019 at $197.61, which was an important input to my proprietary analytics. The stock’s annual value for 2020 is the lowest horizontal line at $180.49. Its semiannual pivot for the first half of 2020 is $216.19. Its first quarter value level is $197.97. The close of $213.97 on Jan. 31 was another input to my analytics, and the monthly pivot for February is $216.79. This week’s risky level is $222.53.

The weekly chart for McDonald’s

Refinitiv XENITH

The weekly chart for McDonald’s is positive but overboughtwith the stock above its five-week modified moving average of $209.20. The stock is well above its 200-week simple moving average, or “reversion to the mean,” at $163.13, last tested during the week of Sept. 11, 2015, when the average was $95.65.

The 12 x 3 x 3 weekly slow stochastic reading ended last week rising to 81.14, up from 78.15 on Feb. 7. As the stock was nearing its all-time high on Aug. 9, this reading was above the 90.00 threshold. This “inflating parabolic bubble” popped with the 15.5% correction discussed above.

Trading strategy: Buy McDonald’s stock weakness to its quarterly value level at $197.97 and reduce holdings on strength to its weekly risky level at $222.53. Semiannual and monthly pivots are $216.19 and $216.79, respectively.

How to use my value levels and risky levels: The closing price of the stock on Dec. 31, 2019, was an input to my proprietary analytics. Quarterly, semiannual, and annual levels remain on the charts. Each calculation uses the last nine closes in these time horizons. Monthly levels for February were established based upon the Jan. 31 closes. New weekly levels are calculated after the end of each week. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year, while annual levels are in play all year long.

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 shares 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 their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting 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. A reading above 90.00 is considered an “inflating parabolic bubble” formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered “too cheap to ignore,” which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.

Related Posts