Stocks near high-profile retracement levels

11/06/19
  • MCD and SBUX have retreated from their summer all-time highs
  • Both stocks enjoyed strong 2018–2019 rallies
  • Prices approached key retracement/support levels in recent days

With all the recent chatter about all-time market highs, two stocks may have recently grabbed the attention of bulls specifically because they weren’t anywhere near their records.

McDonald’s (MCD) and Starbucks (SBUX) both popped up on a LiveAction scan yesterday for tickers with the largest number of options trades (below), a potential sign of trader engagement. Unlike high volume, which can sometimes represent one or two large institutional trades, a large number of traders can suggest more widespread interest in a symbol.

LiveAction scan: Largest number of trades. Unusual options activity. Heavy MCD, SBUX options activity.

Source: Power E*TRADE


And what was going on in MCD and SBUX?

MCD has been in the news a couple of times recently. The stock, which had been edging lower after hitting an all-time high around $222 in August, dropped sharply after its most recent earnings release on October 22. After a week of follow-through selling, the stock bounced for a few days, but then got tripped up by the firing of CEO Steve Easterbrook this week—not because of business performance issues, but because of a consensual relationship with an employee that broke company policy.1 (An important distinction, since it arguably has bearing on whether the stock’s recent drop was more of a potentially overdone “emotional” reaction to a seemingly negative headline, or an objectively bearish assessment of  the company or its stock.)

The average 12-month analysts price target for MCD is still around $2222—roughly 15% above current levels—but that may be less important to short term traders than the fact that the stock rallied strongly yesterday after retracing almost precisely 50% of its August 2018–August 2019 rally:

McDonald’s (MCD), 7/13/18–11/5/19. McDonald’s (MCD) price chart. Bounced off 50% retracement.

Source: Power E*TRADE


Many traders often look for rebounds or trend reversals after a stock gives back half of a long-term rally, and in this case the 50% retracement level roughly coincided with the chart support implied by MCD’s late-2018/early-2019 highs.

Moving from burgers to java, Starbucks (SBUX) finds itself in a similar situation in terms of price action. After a sizable rally (up more than 100% from June 2018 to July 2019), the stock pulled back from its all-time high in recent weeks, and slumped after its most recent earnings report (on October 30).

Starbucks (SBUX), 6/22/18–11/5/19. Starbucks (SBUX) price chart. Close to retracement level.

Source: Power E*TRADE


Yesterday the stock was in the process of racking up a third-straight down day since that release, which left SBUX a little below $82—just a couple of bucks from its own notable support point, the 38.2% Fibonacci retracement level (around $79.75) of the June 2018–July 2019 rally, which also corresponds to a test of the May high. (Traders anticipating the stock to reach the 50% retracement will be watching how shares behave around $73.50.)

Retracement levels like these don’t guarantee rebounds, they’re just levels many traders reference when attempting to catch a move in a correcting stock. Chasing hot stocks that are pushing to new highs can be a risky game, which is precisely why many long-time traders look for possibilities in strong stocks that have pulled back—for instance, a couple of brand-name tickers that just happened to have outperformed the S&P 500 (SPX) over past three years.

Today’s numbers (all times ET): Productivity and Costs (8:30 a.m.), EIA Petroleum Status Report (10:30 a.m.).

Today’s earnings include: Elanco Animal Health (ELAN), AES (AES), Albemarle (ALB), Baidu (BIDU), CVS Health (CVS), Vulcan Materials (VMC), New York Times (NYT), Marathon Oil (MRO), Wendy’s (WEN), Discovery (DISCA), GoDaddy (GDDY), Royal Gold (RGLD), Qualcomm (QCOM), Square (SQ).

 

Click here to log on to your account or learn more about E*TRADE's trading platforms, or follow the Company on Twitter, @ETRADE, for useful trading and investing insights. Online stock, ETF, and options trades1 are now commission-free.


1 Chicago Tribune. McDonald’s CEO Steve Easterbrook fired over consensual relationship with employee. ‘This was a mistake.’ 11/4/19.

2 TipRanks. MCD McDonald’s Corp Analyst Price Targets. 11/5/19.

What to read next...

11/05/19
Health care stocks have been under the weather for a long time, but the color has recently returned to the cheeks of certain stocks.

11/04/19
Last week started with a bang—and ended that way, too.

11/01/19
Earnings-related pattern suggest bulls and bears may both have opportunities in social media stock.

Looking to expand your financial knowledge?