Shares of McDonald's Corporation (NYSE: MCD ) have rallied nearly 35% since the U.S. election results from last November. The majority of this move has come so far in 2017 where the stock is now higher by 26% year to date. This has resulted in a notably steep slope on the charts, a bump into technical resistance and, through the lens of fundamental analysis, arguably stretched valuations.
Source: Mike Mozart via Flickr
When a low-volatility environment reigns in the stock market and algorithms bet on a continuation of this environment, coupled with underperforming fund managers having to chase certain stocks higher, it can quickly escalate and lead to vertical rallies. Case in point, MCD stock which now as a result by just about any metric I apply is stretched.
A simple yet effective way to gauge a stock's intermediate to possibly longer-term overbought or oversold readings it so see where it trades relative to a multiyear trend. This applies to both up and down trending charts as well as those that are chopping sideways.
MCD Stock Charts
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In the case of MCD stock, we see that a new steeper up-trend began to emerge in the 2003 - 2004 period as the stock snapped out of a multiyear corrective phase. This big-picture up-trend is thus now about 14 years old and the upper end of which was hit last week.
On this chart, we see that the most recent leg higher in MCD stock is the result of a near vertical non-stop rally that now has the stock overbought in any time frame I can think of. On the weekly chart alone the MACD momentum oscillator at the bottom of the chart is at all time record (overbought) readings.
From a simple earnings multiple angle, McDonald's stock currently trades at just about 27 times earnings, which by my research is at least at a five-year valuation high. This alone is no reason to sell the stock, but it does show a steepening in the ratio along with what we are seeing on the price charts.
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On the next chart, we see that a simple upside extension target has recently been met. Measuring the rally from the August 2015 lows into the May 2016 highs and applying the extent of this rally to the next rally that began in November 2016 following the U.S. election results, we see that this measured move has now been met. This alone too doesn't mean MCD stock has to begin crumbling from here, but it does in my eye significantly reduce the odds of a continued move higher at this rate.
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Lastly, on the daily chart we see that MCD stock's near vertical leap year-to-date now has it trading significantly above its medium term moving averages (50-day, 100-day and 200-day moving averages - yellow, blue, red lines respectively).
At this juncture investors and traders would be wise to watch MCD stock to start slipping into a better consolidation phase, which most likely will begin with a notable bearish reversal (i.e. bulls get exhausted and fail to push the stock higher). Such reversals are an important technical signal that can lead to high-probability setups, and for those unfamiliar, I'll be hosting a special webinar June 15 for InvestorPlace readers to explain these signals and how to turn them into winning trades.
Investors who own MCD stock at this level may want to seriously consider taking at least partial profits in their holdings while active investors and traders looking to make quick cash flow could sink their teeth into the next bearish reversal (if and when it happens), which then through a multiweek lens stands a good chance to see the stock mean-revert back lower into the low to mid $140s.
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