The sell-off for McDonald's Corp. (MCD) driven by the E. coli outbreak was meaningful from a chart perspective.
The drop resulted in confirmation of intermediate-term overbought 'sell' signals from both the weekly stochastics and the DeMark Indicators. Additionally, MCD is overbought from a long-term perspective in our work. As a result, the MCD chart has the look of false breakout, which tends to give way to more downside.
The downturns in the stochastics increase downside risk in the weeks ahead. Initial support on the chart is near $289 and then $272 based on Fibonacci retracement levels. McDonald's releases its earnings report tomorrow, which could contribute to near-term volatility.
Should MCD get back into last week's gap, above roughly $302, that could help provide temporarily relief from the pullback. However, the intermediate-term 'sell' signals previously highlighted suggest an earnings-driven rally will likely fade quickly, so we might use strength to reduce exposure. Even with its recent decline, MCD ranks in the top half of stocks in the restaurant industry group when looking at 3-month and 6-month returns.
However, the recent news of the outbreak and negative technical catalysts for MCD suggest investors should look elsewhere, for now. We expect rotation into some of the beleaguered laggards in the industry group. Laggards that could benefit Two examples of lagging restaurant stocks are Bloomin' Brands Inc.
(BLMN) and Jack in the Box (JACK) , both of which have .