McDonald’s Shareholders Hitting The ExitsThe fast food giant could drop another 10% to 15% before bottoming out.
Dow component McDonald’s Corp. (MCD) posted an all-time high at 231.91 in October and rolled over, slicing through support at the 50-day moving average. Three attempts to remount that barrier have now failed, raising odds for a secondary selling wave that drops the fast food giant another 10% to 20%. Volume readings are supporting this bearish call, with funds departing at a steady pace, dropping accumulation indicators to the lowest lows since September.
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Third Quarter Sales Contraction
The stock sold off after Q3 2020 earnings on Nov. 9, despite beating top and bottom-line estimates by healthy margins. The company also declared a $1.29 per-share annual dividend during the release but that didn’t stop an aggressive decline that began with a 5% rally gap. In retrospect, it’s easy to see why shareholders hit the exits because Mickey D. reported a 1.5% year-over-year revenue decline and 2.2% drop in global comparable sales.
Overhead supply from the ‘bull trap’ continues to weigh on price action, inducing market players to sell modest recovery attempts. The second pandemic wave is adding to downside pressure, compounded by new lockdowns and shutdowns. McDonald’s has adjusted to the restrictions through drive-through and delivery options but the virus will continue to weigh on revenue, especially in parts of the world where restrictions are more severe than in the United States.
Wall Street And Technical Outlook
Wall Street has been slow to react to growing headwinds, posting a ‘Strong Buy’ rating based upon 21 ‘Buy’, 6 ‘Hold’, and no ‘Sell’ recommendations. Price targets currently range from a low of $209 to a Street-high $265 while the stock closed Friday’s U.S. session just $1 above the low target. This humble placement usually supports higher prices but the reverse may be true in this case, with analysts asleep at the wheel due to end-of-year strength in other market segments.
McDonald’s failure at the 50-day moving average exposes a trip into the 200-day moving average near 200. That isn’t so bad but the stock has also failed a breakout above the 2019 high at 222, setting off long-term sell signals that favor a breakdown at the round number and downside into the November 2019 low at 187, which also marks a key Fibonacci retracement. Fortunately for bulls, a bounce from that level could complete a major breakout pattern in 2021.
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Disclosure: the author held no positions in aforementioned securities at the time of publication.