There were two immediate triggers to our McDonald’s (MCD) trade. First McDonald’s reported less than expected same store sales increase. Second in the premarket McDonald’s broke the support at $78.82, its 50 moving average.
The macro picture is not favorable for a number of reasons. First McDonald’s is feeling the pinch of higher commodity costs, second McDonald’s is unable to increase prices to offset costs. Third the overall market has pulled back but McDonald’s shares are still near all time high. And fourth McDonald’s trades at 16 time forward earnings, which is a premium to the S&P 500.
Based on the data, the stop should have ended up under $78. yesterday.
One of the common techniques we observe is that when a stock is about to go down, the brokers who generate substantial fees from the company come out in force casting a bullish spin. Yesterday this caused a massive short covering.
Our system worked and we were not short McDonald’s from $78.70 on the breakdown from the support. We ended up with an average price of $78.38. We took small losses on one tranche, but made up for the losses and generated a small profit on another tranche.
Caution: McDonald’s Wall Street machine is out in full force promoting the stock including positive articles in several financial media outlets.
We are exiting our position in McDonald’s at $81.15 in the premarket.
Those not able to exit right now in the premarket may consider exiting at the earliest possible in the range of $80.90 to $81.25.
We cannot predict how McDonald’s will open in the regular market, that is why we are getting out now. If the stock moves beyond the buy to cover zone in the regular market, then it is an individual decision as to what to do. Probability is high that after the initial pop, the stock will pull back. But the fly in the ointment is that S&P futures are positive this morning and may pull up McDonald’s.
