Goldman Sachs recently downgraded McDonald's (MCD) from buy to neutral. Maybe there was good reason for this. The company's sales are under pressure as the European economy flounders and China's growth cools. "Year over Year" sales at outlets that have been open more than a year rose a slower-than-expected 3.3%. But maybe the timing of this can tell us something. McDonald's has been on a bearish trend for about 10 weeks. It peaked in early March, almost reaching 100 before backing off and settling at about 86 in early June. Since this time, it looks like it has been consolidating and we have a short symmetrical triangular pattern forming.
During this decline Goldman Sachs still had the company rated as a buy. Why did the stock turn like it did in the first place? Looking at it from a long term perspective, investors may have seen difficult times coming, and here is what they may have seen. At the beginning of its move in 2011 it was a good value but then as more and more investors were getting in, there came a point where it was over-valued. All stocks correct themselves eventually. I think this is all McDonald's was doing. It was time for a correction McDonald's cautioned that the second quarter's per-share earnings figure was going to be about 5%, or 7 to 9 cents. But I believe this correction may be a good point of entry for the long term and short term investor.
There could be one of two things happening with the symmetrical triangle I wrote about earlier. It could be a continuation pattern and the stock would go down, or it could be a reversal pattern which means the stock has stopped its present move down. Well if I look at the RSI indicator, I can see a positive divergence taking place. This means that the possible change in direction is supported by strength in the upward movement. So it appears to support a bottom and future upward movement which we will try to take advantage of with a short term income play.
(click to enlarge)
The Options Play
McDonald's is trading at 88.53. There is a possibility that the stock will not turn bullish right away. For this reason we shall look at playing a couple months out for time decay protection.
- Buy a September 2012 call with a strike of '90.00' (priced at $1.78)
- Sell a September 2012 call with a strike of '92.50' (priced at $0.87)
- Net Debit to Start: $0.91
- Maximum Profit: $1.59
- Maximum Risk: net debit
- Maximum Length of Trade: 3 months
Reasoning behind the Trade
- McDonald's looks like it has started a new bottom and the RSI indicator my lean support to that observation.
- I believe the correction has brought value back to the stock at this point.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
