Todays Big Stock: Arcos Dorados Holdings, Inc. (NYSE: ARCO)

Arcos Dorados Holdings, Inc. is a McDonald’s franchisee. As of year-end 2010, Arcos operated or franchised 1,755 McDonald’s-branded restaurants, which represented 6.7% of McDonald’s total franchised restaurants globally. It operates McDonald’s-branded restaurants under two different operating formats, company-operated restaurants and franchised restaurants. Of its 1,755 McDonald’s-branded restaurants in the territories, 1,292 were company-operated restaurants and 463 were franchised restaurants. It generates revenues from two sources: sales by company-operated restaurants and revenues from franchised restaurants, which consist of rental income, which is based on the greater of a flat fee or a percentage of sales reported by franchised restaurants. Arcos also owns the land for 510 of its restaurants and the buildings for all but 12 of its restaurants.

For a potential trading opportunity, please take a look at the 1-year chart of ARCO (Arcos Dorados Holdings, Inc.) below with my added notations:

 

Since June ARCO had been commonly holding $20 as a key level of support (navy). After breaking below that $20 level in January, the stock fell down to the $18 level (red) and rallied nicely from there. Earlier in March the stock broke below the $20 level again and has now fallen back down to the $18 support. One potential clue as to whether or not ARCO will hold the $18 support lies in the fact that although the overall stock market is hitting new highs, ARCO is at it’s 52-week low. This seems to imply that the stock is weak and possibly poised to break lower.

The Tale of the Tape: ARCO has an important level of support at $18.00. If the stock were to break that support it would also be breaking to a new 52-week low. In that case, a short trade should be made with a stop placed above $18. However, if you take what you see, a long trade could be made here at $18.

Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

Good luck!

Christian Tharp, CMT