Thinking about trading the golden arches? Here’s the bearish trade on McDonalds (MCD). (September 26, 2017)
MCD BA MCD SP-500 MCD
We are looking at McDonald’s ( NYSE:MCD ). This is why: I am not really a big fan of The Golden Arches right now. Frankly, I will cut right to the chase, I think this is shortable, I need to see how it opens up tomorrow. I am always a little leery because of prior unpleasant experiences. When I short a stock that has already been declining three or four days and I think the decline is just going to continue, the market proves me wrong, I get shaken out and go, “Oh crap!” Buy back the stock, and then it makes the big move. So, we don’t do that anymore. We have to be very careful of shorting stocks. However, with that said, let’s look at this thing.
This has BEEN one of the strong performers in the Dow. It has tapered off a little bit but so has the Dow. You can look at Boeing ( NYSE:BA ), it did the same thing. Boeing ( NYSE:BA ) has been a strong performer. But McDonald’s ( NYSE:MCD ) now has changed, and this is the way I want to look at this though: We could just say, “Oh, it is breaking down. Breaking down below support here at 155.00; short the snot out of this thing.
Let’s look at it from this perspective, relative strength. Relative to the S&P 500 ( INDEXSP:.INX ). It is very simple, up is good. When this relative strength line is moving up it means that the stock is outperforming the S&P-500 ( INDEXSP:.INX ). Now, you might think, “Well, that is kind of obvious Dan. The stock is moving up, McDonald’s is moving up.” Not really so obvious and here is why: Again, this is relatively relative to the S&P 500 ( INDEXSP:.INX ).
So let’s say the S&P-500 ( INDEXSP:.INX ) was moving down and McDonald’s ( NYSE:MCD ) was also moving down, just not as fast, it would actually be outperforming the S&P-500 ( INDEXSP:.INX ). Performance stinks on both of them, But what we are seeing is the S&P-500 ( INDEXSP:.INX ) still kind of trickling sideways, doing okay. Then McDonald’s ( NYSE:MCD ) is now hitting lower highs on this relative strength. So the fact that we are seeing institutional distribution here is a very telling sign for this stock, and it isn’t good.
This is what I would suggest doing: Watch and see how this thing opens up tomorrow. I highly doubt that you are going to see some big snapback tomorrow. Ideally, we could actually see the stock rally a bit. Who knows? Maybe the market is a little strong tomorrow; this comes up 154.00, 155.00 would be better, 156.00 would be AWESOME. Short the stock here and then watch for the rollover. And then you would put your buy stop, if you are shorting it up here, you put it just a little bit above the 50-day moving average. You have got a really, really high probability short with a very, very low risk of loss. In other words, you are just not risking that much.
But even now, if we look at this on a percentage basis, if you are shorting the stock here at 153.00, you are really saying, “Alright, I am wrong if the stock rallies back above 160.00.” So you would put your buy stop right up there and what you are risking is about less than 5 percent, which isn’t too bad. I just think that initially and I will leave you with this, on an initial trade entry, I think 5 percent is too much to risk. I think you want to risk 2, maybe 2.5 percent, Because it is tougher to make back money that you lost than it is to hang on to money that you didn’t trade. So we want to make sure that we are getting the best entry possible. But ultimately I think McDonald’s ( NYSE:MCD ) goes lower from here. I think it is a good short.
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