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Is McDonald's Reversing?

McDonald's' retracement culminated in the firing of CEO, Steve Easterbrook on November 1st. Mr Easterbrook was ousted by the company's board following an investigation into a relationship with an employee which violated company policy. The board's decision to fire Mr Easterbrook comes at an interesting point on the chart of McDonald's' share price, as will now be shown.

Observe the chart in figure 1. We will be looking at McDonald's' daily chart.

Figure 1

The stock had a strong start to the year, rising over 30% from December lows to highs in August of this year. After a brief consolidation, the stock has been retracing since and made a decisive low as market participants responded to news of the CEO's departure from the company.

Figure 2 shows the same chart with Fibonacci retracement overlays.

Figure 2

The first set of levels is derived from the price range between the low at A and the high at B. Notice that the lowest trough of the retracement touched and then reversed exactly from the 50% level from this range. This is also the low made when Easterbrook was fired.

The second range in figure 2 is derived from the price distance between the low at C and the high at B. This price range represents the final thrust of the uptrend. The 2.618 Fibonacci extension projects near to the 0.5 level from the first Fibonacci range. The coincidence of levels from both ranges creates a confluence zone shown by the green band. This represents a relatively strong barrier to price from which a resumption of the prior uptrend may begin.

Take a look at the volume action in figure 2. Volume spikes to extreme levels as the low is put in place and remains comparatively high on a number of days after the low. A rejection of a significant support level carries a greater degree of bullish bias when it occurs on high volume, since the market has shown a great deal of commitment to the reversing price action. Potential support and resistance levels can also be considered more important if they have acted as significant barriers to price historically. It can be seen in figure 2 that the 50% level acts as major resistance during the uptrend.

Figure 3 shows the same chart scaled in to focus on more recent price action. The RSI oscillator is shown.

Figure 3

When the low was put in place last week, the RSI was displaying standard bullish divergence. Shown by the slope of the pink trendlines in figure 3, price made a lower trough while the RSI made a higher trough. This is a signal of changing momentum in a declining market, suggestive of a potential reversal.

Conclusively, there is a very strong support zone around $187-189. The market has already rejected the level, but there could be much more upside to come. If the prior uptrend is to resume fully, price could return to, and exceed, previous highs around $221. With Mr Kempczinski, Mr Easterbrook's successor, at the helm, McDonald's may end 2019 and enter 2020 very favourably, as far as the share price is concerned, that is.

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