When I look at shares of McDonald’s, it is very clear that there are sellers just above $100. I don’t care if you’re a fundamentals guy or technical or even if it’s your first day on The Street. It cannot be argued that there are, and have been, sellers just above $100 for the past 3 years.
This tells me that there is currently overhead supply since the price of $MCD is just around $99. We have rallied up and tested these levels 3 times since early 2012 and for whatever the reasons, sellers are willing to sell up there. Supply clearly exceeds demand. The reason is irrelevant as far as the market is concerned, so I just want to focus on the fact that this is the case: There are more sellers than buyers. In other words, supply exceeds demand just above $100.
But the more times that this level is tested, the more sellers that have been willing to sell stock up there will have already sold. Eventually if this level is tested enough times, anyone willing to sell up there will have already done their selling. When that selling dries up, or at least gets to the point where demand now exceeds that supply, that’s when you get what people like to call, “a breakout”.
Here is daily bar chart of McDonald’s going back to the lows in 2008. I think $MCD has consolidated these gains very nicely and at some point in the near future will retest this overhead supply for the fourth time.
Ultimately, I believe the sellers will dry up and at these levels just above $100, demand will exceed supply. This is when prices will rip higher and that’s when I want to be a buyer. The price target based on the amplitude of this consolidation is about 20 points higher which takes up above $120. This is where we will want to be taking profits.
For now, we want to sit tight and be patient. There’s no reason to own this here, particularly from a structural perspective. We’re not in any rush. Time is on our side. But when this overhead supply dries up, I think the upside resolution could be extremely powerful.
I don’t believe in triple tops, and I think this upcoming breakout will be just another good example as to why they don’t exist.
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