A Short Setup for McDonald's

 | Dec 21, 2012 | 10:00 AM EST  | Comments
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Stock quotes in this article:

mcd

,

aapl

I hope that the Mayan calendar shift brings us new fast food places that don't serve fried pink slime and call it nutritious. McDonald's (MCD) is currently into a very important resistance zone. With that in mind, I'm betting on the short side in this one. That being said, I might be too early on my entry and I will explain why by showing you more than one time frame chart for this stock.

Let's take a look at the daily chart. A vote for this bearish case comes with price being below the 200 SMA. The 50 SMA does not support it, however. It is better when both the 50 and 200 SMA's support a trade setup, but it is not a deal breaker. The sell setup is based on symmetry with the prior rally swings on this daily chart. On the daily chart, I have illustrated the prior rally swings that I have used in this analysis. The ones I measured were $7.40, $7.85 and $7.94. I projected 100% of these prior rallies from the November lows and have come up with a resistance decision at the $90.71-$91.84 area. This zone includes three 100% price projections along with a .786 retracement. Now, I did see a sell trigger against this zone on both the aggressive entry chart (15-minute) and the regular swing trade trigger chart (30-minute). So I bought puts and my maximum stop is above the recent high made at $90.85.

Source: Dynamic Trader

I think my distaste for the type of food they serve up has colored my judgment on the stock. The trade might still work for me (after all, I did see a trigger according to my trading plan, but I could have waited for the safer bet. Now you can learn from what might potentially backfire or come back to haunt me. I do still like this setup, but the odds for it to play out would be much higher if I hadn't been in such a hurry and was willing to wait for a break of the key support on the 30-minute chart just came on the flip side. So let's take a look at that next.

Source: Dynamic Trader

So I also ran my work on the 30-minute chart of MCD, and on this time frame, there is actually a bullish setup. I wanted MCD to break below this level because I placed the bearish bet. But when I looked at the intraday chart after the market closed, I got a little upset with myself for not waiting for these two time frames to be in agreement -- or at least exiting the trade when the support on this 30-minute chart was not taken out.

For the time frames to be in agreement, we would need to see a break of the 30-minute support ($89.00-$89.47) and then take out the prior swing low at $88.50. If this occurs, then the odds for a decline continuing from the recent high are much higher. The odds will also be much higher if the 5 EMA crosses below the 13 EMA on the daily chart. The downside potential if this setup does start to play out is the $81.26 area.

Well, my stop is in place above the recent high and your choice will be whether or not you like this setup. If you do, will you wait for the higher probability entry -- like I didn't? In prior articles, I have mostly just discussed simple trigger rules. In a future article, I may address how matching up the time frames will provide the higher probability setups. For example, Apple (AAPL) on the daily chart is bearish and my 30-minute sell setup that I posted in Columnist Conversation was in agreement with that. I don't know if that setup will play out fully or not, but I certainly feel a bit more comfortable with that trade as the daily and 30-minute charts are in agreement.

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