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McDonalds Shows Good Relative Strength

10/20/05 09:40:09 AM
by Arthur Hill

A triangle breakout and good relative strength bode well for the Big Macs.

Security:   MCD
Position:   Buy

McDonalds (MCD) surged in July-August and then consolidated the last two and a half months. The strong move above 30 sets the bullish tone in the stock and the consolidation is viewed as a resting period. There were two attempts to move higher in September, but both were rebuffed, possibly from overall market weakness. However, the stock held support around 31-32 and recently broke above the upper trendline of a triangle on good volume. This is bullish and backed up by good relative strength.

FIGURE 1: MCDONALDS. The fast-food giant looks strong. Its price held firm in October and then broke resistance (red oval). The stock formed a harami in early September (blue circle) and a large bullish engulfing pattern on September 22 (green oval).
Graphic provided by: MetaStock.
Graphic provided by: MS QuoteCenter.
 
The top chart in Figure 1 shows the price relative, which compares McDonalds against the NYSE Composite. The NYSE Composite broke below its August lows in October, but MCD held this low and failed to succumb to overall market weakness. That is why the price relative held firm in October and then broke resistance (red oval). The breakout above the September highs shows that MCD is now outperforming the NYSE Composite, boding well for further gains.

Support around 31-32 looks solid and volume flows have been bullish the last two months. The stock formed a harami in early September (blue circle) and a large bullish engulfing on September 22 (green oval). These bullish candlestick reversals show buying pressure and reinforce support. In addition, upside volume has been outpacing downside volume since early September. This further reinforces support and it would take a move below 31 to turn bearish.



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

Title: Editor
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