Minding McDonalds’ Midweek Gap

Within minutes of McDonald’s (NYSE: MCD) big, down opening on Thursday, I tweeted “Don’t you wish you had a

strategy for trading gaps?”

More on that later. In the hours since McDonalds gap down of more than 3%, the rest of the

trading world has learned that the company has blamed everything from the European debt crisis

to the weather to explain the disappointing same-store sales that served as catalyst for the

midweek meltdown. And while more than a few financial pundits had a good time mocking

McDonalds’ message, there were no doubt at least a few milder mannered traders and investors

taking advantage of McDonald’s sharp pullback into technically oversold territory, and buying

the weakness.

In breaking down to its lowest level since mid-December, shares of McDonalds have earned a

positive, short-term edge of more than three-quarters of a percent. Despite this, and a one-

point ratings upgrade, MCD is still set to open in neutral territory when trading begins on

Friday. Should the stock follow-through to the downside, however, the likelihood of the

short-term edges growing and the stock potentially earning the kind of ratings upgrade that

would find MCD in “consider buying” territory would be that much stronger.

Note that Thursday marked the “return” of MCD to oversold levels. McDonalds was trading short-

term oversold as recently as last week. Then, a pullback during which the stock traded lower for three days in a row (the final two in technically oversold territory) led to a rally in McDonalds that took the stock higher for three out of the next four sessions. Before that, a sell-off that sent MCD lower for five out of six sessions in mid-February anticipated a move higher of more than 2%, as the stock finished higher for the next five consecutive days.

Whether MCD will respond to the current pullback as it has to other recent corrections remains to be seen. What is clear, however, is that traders who are typing up McDonald’s obituary may want to step away from the keyboard – at least while the stock’s positive, short-term edges remain intact.

By the way, I couldn’t help but notice that Starbucks Corporation (NASDAQ: SBUX) was up well over two and a half percent in afterhours trading. Thinking about McDonalds, a company like Starbucks comes readily to mind. In the same way that many have come to doubt the growth prospects of Starbucks, so have the bears tried to bring their brand of “fear, uncertainty and doubt” to the market for McDonalds shares.

But if there is a Wendy’s (NYSE: WEN) or a Burger King in your area, then – all personal preferences notwithstanding – the truth of the matter is that there is still more than enough room for McDonalds to grown and expand.

I mentioned gap trading at the beginning of this column. If trading gaps in stocks and exchange-traded funds is something you’d like to add to your arsenal of trading techniques, the click the link to read about the latest from Larry Connors Trading Strategy Series: Here’s How to Trade Gaps and Pullbacks

David Penn is Editor in Chief of TradingMarkets.com