Back in May, a group of Safety in the Market students got together for a Live Event in Sydney called Power of Price, where we analysed some major tops before catching up over a cup of tea and some cake. It was great to catch up with some old friends and also meet some new ones, and I’d like to say thank you again to everyone who made the effort to come along on the night.
On the night, we revisited some of David’s lessons from the Number One Trading Plan and saw how they called the January, 2018 high on McDonald’s, which is shown in Chart 1 below.
Chart 1 – McDonald’s (MCD.NYSE)
Now, I won’t be breaking down that top again in this article, however, I would encourage you to pull out your Number One Trading Plan and re-read the Price Forecasting chapter, because this McDonald’s top is a near-perfect replica of one of the charts in that chapter. What I will be doing, though, is taking a look at what happened next. In Chart 2 below, I have marked the date of 7 May, 2018, the day of the Power of Price Live Event.
Chart 2 – The McDonald’s Price Chart on 7 May, 2018
As you can see, by the time May came along, the major high had come and gone, and the market had retraced, regaining some of the losses. So, what do we do now? If you’ve ever done a seminar, webinar or coaching program with me, you’ve almost certainly heard me talk about the concept of a re-test. The theory is that after a major top or bottom comes in, the market will often make one last lunge for that top or bottom and then fail. Sometimes the re-test will get very close to the old top or bottom, but if it is truly a re-test, it will eventually fail, and the point of failure often becomes an excellent trading opportunity. So, what does all of this mean for McDonald’s?
As I told students back in May, if the January, 2018 top is a yearly top, then the move up from the March low will simply be a re-test of the top, rather than a new bull market. This means we can start looking for some potential Price Resistance levels that may help us to call the end of the re-test. The techniques that I always use to try and determine the end of the re-test all come from Section 11 of the Number One Trading Plan, the chapter on Price Forecasting. Let’s start with a Ranges Resistance Card in Chart 3.
Chart 3 – Ranges Resistance Card on McDonald’s
Whether we are in a bull market or a bear market, I always like to run a Ranges Resistance Card over the entire range as it unfolds, watching the key retracement levels each time the market has a pullback. If you go and study a lot of examples, you’ll see that the 50% retracement level often calls the end of the re-test, although almost never in isolation. That is, it won’t be the 50% level ALONE that calls the end of the retracement or re-test, it would be the 50% level PLUS at least one more price resistance level. In this case, there was no clear cluster at the 50% level and by the time our Power of Price seminar came around, the 50% level had already been cleaned out.
The Ranges Resistance Card is a simple but powerful tool, but it rarely works in isolation. The 25%, 37.5%, 50%, 62.5% and 75% levels often give you major turns in the market, but there will almost always be more evidence for the turn than a single Resistance Card. In the case of McDonald’s, I noticed that if the First Range Out from the March, 2018 low repeated 100%, we would have a cluster at the 75% retracement level. This is shown in Chart 4 below.
Chart 4 – A Price Cluster on McDonald’s
Now we have something to work with! Suppose that the re-test ended here. That would mean the size of the re-test would be slightly smaller than the last range up, with MCD falling just short of the 100% milestone of the last big range up, as shown in Chart 5 below.
Chart 5 – The Last Range Up on McDonald’s
We can see that a Price Cluster had formed on McDonald’s and a quick look at Chart 6 below shows that this is as high as the McDonald’s re-test ran before commencing a strong run down.
Chart 6 – The End of the Re-test?
I’m going to end this article with the monthly bar chart on McDonald’s. The month of June, 2018 was a big Outside Reversal Month, as you can see in Chart 7 below.
Chart 7 – An Outside Reversal Month on McDonald’s
Think about how you would interpret this ‘Signal Bar’ pattern if it appeared on the daily bar chart. Now, take that reasoning and think about how it applies to the MONTHLY bar chart of McDonald’s.
In my Platinum video for this month, I’m going to take a look at the next step of this process, which is setting some price targets for the next move. Before watching that video, I would encourage you to open a chart of MCD.NYSE and see if you can put together some Price Forecasts of your own.
All the best