Dow component McDonald's Corporation (MCD) is likely to break March support in coming weeks and drop to the lowest lows since 2015. A variety of fierce headwinds have come into play in the first quarter, topped by the closure of restaurants and/or dine-in eating all across the world. The company is assisting franchisees under economic stress, but that's unlikely to forestall bankruptcies if sales don't bounce back in the next one or two months.
Mickey D has borrowed the $1 billion available under its credit agreement, highlighting a capital shortfall that will grow substantially if COVID-19 doesn't run its course in the first half of the second quarter. Making matters worse, Wall Street is pushing the fallacy that sales will rebound immediately when, in truth, customers will avoid public places for months after hospitals empty out. In addition, the industry has failed to convince many folks that restaurant workers and delivery drivers have taken the precautions needed to avoid virus transmission.
Americans will also come out of this crisis a lot poorer, despite massive government stimulus programs. At its core, casual dining is a cyclical industry, with consumers closing their wallets when the cash is needed to pay the household bills. A recent surge in meat sales also indicates that many folks are learning to cook at home for the first time, perhaps triggering a paradigm shift that generates fewer trips for Happy Meals.
MCD Long-Term Chart (1999 – 2020)
A multi-year advance ended at $49.69 in November 1999, marking a high that wasn't challenged for the next seven years, ahead of a decline into the new millennium. Selling pressure eased in the mid-$20s in the second quarter of 2001, establishing a support level that broke down in July 2002. Aggressive bears controlled the ticker tape into March 2003, when the stock finally bottomed out at a 10-year low in the lower teens.
The subsequent recovery wave posted steady gains during the mid-decade bull market, completing a round trip into the 1999 high in May 2007. A breakout ran into a buzzsaw of sellers after reaching the low $60s in December, yielding volatile range-bound action on top of new support. Even so, the stock exhibited relative strength compared to broad benchmarks during the economic collapse, underpinning a secondary breakout at the start of the new decade.
The uptrend topped out once again in January 2012, establishing heavy resistance at $100 that denied multiple breakout attempts into October 2015. The "all-day breakfast" initiative was introduced at that time, triggering a breakout that carved a broad Elliott five-wave advance. The bullish pattern finally completed in the summer of 2019, while subsequent downside posted the steepest correction in more than a decade.
The monthly stochastic oscillator entered a long-term sell cycle from the overbought zone in October 2019 and crossed into a buy cycle in January 2020. However, the stock has lost more 50 points since the bullish crossover, telling us the data isn't valid. Price action is currently testing the recent breakdown through 50-month exponential moving average (EMA) support, with the stock trading below that line in the sand for the first time since 2003.
MCD Short-Term Chart (2017 – 2020)
The on-balance volume (OBV) accumulation-distribution indicator ended a multi-year accumulation phase in April 2018 and eased into a support line going back to May 2017. It dropped into that level for the third time last week, while seven days of higher prices have barely budged accumulation readings. This is typical behavior when short covering, rather than bottom fishing, drives price action.
Finally, the stock has reversed off the 50% sell-off retracement level after filling the March 15 gap. The .618 Fibonacci retracement level at $180 has narrowly aligned with the March 12 gap, marking a price zone that is unlikely to be breached at this time. However, there's no timeline on an inevitable test of the March low because the tape is still working off an extremely oversold short-term technical condition.
The Bottom Line
McDonald's stock is likely to break the March low and test round number support at $100.
Disclosure: The author held no positions in the aforementioned securities at the time publication.
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