We noted the interesting price action on the McDonalds (MCD) chart in this earlier article.
An inverse head and shoulders pattern was forming and the stock was in the process of reversing a two month decline.
An inverse head and shoulders pattern is a bullish reversal pattern. It consists of a lower low followed by a higher low, and it reflects a transition in the direction of the stock price and defines a neckline or breakout level. It is often seen at important lows.
On the McDonalds daily chart the left shoulder of the pattern is delineated by the February low, the March low marks the head, and the higher low that followed defines the right shoulder.
(We also warned of a potential head and shoulders top in McDonalds shares back in January just before the stock price began a two month decline.)
The inverse head and shoulders pattern did form on the chart but the breakout that followed has faltered. Support at the 200 day moving average is holding but the structure of the candles positioned just above it is weak. There are a series of lower close higher wick candles which suggests a failure to hold higher prices.
The 50 day moving average has crossed below the 200 day moving average. This is the fabled moving average “death cross,” which often signals the end of an uptrend and the start of a downtrend.
There is another bearish technical indication on the McDonalds chart – the direction of money flow. The accumulation/distribution line is tracking lower and below its declining 21 period signal average, and Chaikin money flow is well into negative territory.
These indicators are measures of buying and selling pressure. It appears that despite the bullish implication of the inverse head and shoulders pattern and the break above the $162 neckline resistance level this month, buyers are not stepping up.
Longs should be cautious. Momentum is failing and money flow is not powering the breakout.