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Hi Lou,

What's happening with McDonald's?

– Bill

Story continues below advertisement

Hey Bill, thanks for the assignment. McDonald's Corp. had a great run that ran out of steam as we came into 2012. In the last two reported quarters the company has failed to meet street expectations for earnings which is the financial equivalent of throwing an anvil to a man struggling in the water. MCD has faced increasing competition in the fast food space and that has been reflected in their slowing sales.

A review of the charts will help you better identify the opportunities associated with MCD.

The three-year chart outlines the eleven month retreat from the 52-week high of $102.22 hit on January 20, 2012. Patterns worth noting include the death cross that surfaced in June, the double top that formed in October when the shares failed to overcome resistance at $94, and the inability to sustain an advance. What should not be ignored is the downtrend line that is in place. Investors can often find themselves imbuing a scenario with hope in anticipation of a trend reversal. Until the company creates new menu items to keep the competition from grabbing market share you have to respect the trend.

The six-month chart provides a close-up of the double top that took the shares from $94 down to $84. The stock is now trying to move through resistance at $87. The MACD and the RSI both appear to be indicating that the selling has not yet exhausted itself and that we may have to retest $84. In the current environment with the shares offering a dividend yield of 3.58 per cent some investors will be tempted to accumulate the shares for a long term hold. I think that there will be a better entry point and that the best course of action will be to be patient and confirm the bottom of this downtrend.

With regards to your direct question as to what has happened to MCD. In general terms, trees do not grow to the sky. Specifically, the competition in the fast food space took a page out of the company's play book and took a run at the breakfast trade and offered alternatives to the burger for the lunch trade. MCD might be the biggest player in the space but they are not alone and imitation is the sincerest form of flattery.

Make it a profitable day and happy capitalism.

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