Fast Food or Family Style?

01/19/2011 10:00 am EST

Focus: OPTIONS

Thomas Aspray

, Professional Trader & Analyst

chart
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Chart Analysis: As is often the case, technically, the respective outlooks for McDonald’s Corp (MCD) and Denny’s Corp (DENN) are quite different. The improving economic outlook could make many conclude that companies specializing in low-priced dining options are no longer attractive, unless of course they have a good dividend.

McDonald’s will report earnings before the opening on January 24, and the stock currently carries a dividend of 3.3% (this was boosted almost 11% last August). From the December 2010 high of $80.92, which exceeded the upper trend line (line A), MCD has been weaker than the overall market, posting a recent low of $73.94. The weekly technical outlook suggests this underperformance is likely to continue.

  • The weekly on-balance volume (OBV) formed lower highs in December, line C, and has dropped below the 2010 lows

  • Weekly uptrend (dashed line) was recently broken as the 50%-61.8% support level was reached

  • Stronger support resides at $69-$71 with major support in the $67 area and initial resistance at $76.60-$77.70

Denny’s does not report earnings until the middle of February, and its chart looks much more interesting.

  • The weekly on-balance volume shows a pattern of higher highs and higher lows, line F. It has already surpassed the 2010 highs

  • Recent pullback found support at $3.40 (line E) with stronger support at $2.90-$3.10

  • Key resistance is at $3.99-$4.10, which goes back to 2008 (line D)

What It Means: The 2010 highs in MCD were not confirmed by the OBV, suggesting that technically, the stock will have trouble making new highs for some time and may remain range bound. The volume pattern in DENN suggests accumulation, and on a close above $4.10, all investors who bought DENN in the past three years will have a profit.

How to Profit: No recommendation for MCD, other than for its dividend, but a covered call strategy above $76.60 should work out. There are two ways to play DENN, however. Aggressive traders can buy DENN at $3.64-$3.73 with a stop at $3.27. Alternatively, on a close above $4.10, buy at $4.04 or better with a stop initially at $3.47. Initial upside target is in the $5.50 area.

Tom Aspray, professional trader and analyst, serves as senior editor for MoneyShow.com. The views expressed here are his own.

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