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Trade Lesson: McDonald's Shakes The Weak, Profits To The Smart

Jan. 14, 2011 12:24 PM ETMCD
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 McDonald's Corporation (NYSE:MCD) saw a dramatic fall in recent weeks. The stock has been pounded over sales fears.  Yesterday, I discussed the 200 moving average long play and the probability of a bounce on my Rant and Rave blog. Today, the stock opened lower, shaking out the weak amateurs only to roar back to the upside, now trading at $73.73 +1.06 (+1.46%). This is a huge reversal and an engulfing handle on the daily chart.  The daily chart has now recaptured the 200 moving average and the bullish call from yesterday is paying off handsomely.

This morning, I told my Intra Day Stock Chat Room to buy McDonald's within the first few minutes of the trading day.  The entry alerted was $72.23. The reasoning is key here and I will do my best to explain it for those of you that wish to learn. First, we know the chart slammed into the 200 moving average yesterday and is solidly over sold. Secondly, charts will often move below their 200 moving averages to shake out the weak traders and investors and coax on amateur shorts.  This allows the institutions to maximize profit as they take the money from the weak on the move back up. In addition, the key confirmation signal would ONLY be triggered today to the downside IF we closed below yesterdays low. The confirmation signal is proprietary technique I teach our members. Per the entry, we were trading below that low.  My thought process was this. Buying it on the gap down meant, if it did not rally back up today, I would sell and take the loss by the time the market closed today. However, downside risk on an already oversold stock with another gap down was minor.  Maybe $0.25 or so. On the other hand, he upside was huge.  Should MCD rally back and close above yesterdays low, it would likely continue higher and move back above the 200 moving average. This meant that the upside reward was in the range of $1.00 to $2.00 while downside risk was only $0.25. With all these factors, it was an obvious long play.  The signal to buy went out at $72.23.  The home run was hit. The stock is now trading at $73.72 and those that took the trade are in the money by a whopping $1.50. Congrats to those in the Chat Room that took it.

Gareth Soloway

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