I’m not particularly a fan of Chipotle Mexican Grill, Inc. (CMG). I happen to think that at a forward price-earnings of 36, Chipotle shares are pretty overvalued. And the fact the company still hasn’t figured out the cause of its string of E. coli outbreaks spooks me out. But if you’re a short-term trader, CMG stock is ripe for the picking.
This isn’t really a contradiction: To me, an investor is someone who looks at the fundamentals and the long-term potential of a business and decides to put their money behind it. A trader looks at charts, volume, trend lines and perhaps even behavioral finance variables before deciding to put his or her money behind something.
Given the recent fluctuations in the Chipotle stock price, CMG is a trader’s dream.
CMG Stock: Slave to the 20-Day SMA?
Simple moving averages are one of the most important indicators in technical analysis. When a stock breaks above its 20-, 50- or 200-day SMA, it’s often seen as a bullish indicator for where the stock’s heading.
Click to Enlarge Right now, shares of Chipotle are pushing up against their 20-day SMA. This, as you’ll see clearly illustrated in the adjacent chart, has been a difficult point of resistance for shares in recent months.
Despite a “fake-out break-out” in late January and early-February, the stock would meaningfully break above the 20-day SMA in mid-February, only to dip back below that moving average in mid-March and essentially stay there for the next month and a half.
It’s worth noting that when CMG had this tremendous break-out in mid-February, the entire rest of the market did, too. Major market indices, as well as commodities like oil, reached 2016 lows on, or around, Feb. 11 before roaring higher.
That is to say, CMG’s only legitimate breakout of the year above its 20-day SMA was the result of systemic bullishness.
How can this inform traders going forward? Well, it just so happens that Chipotle shares are pushing up against their 20-day SMA in Tuesday’s action, bucking the market’s bearishness and trading about 2% higher in late morning trading. Should CMG stock actually break above its 20-day SMA, I’d advise traders to tread carefully before making any bullish bets.
More to the point, stay on the sidelines until shares break above both their 20-day and 50-day SMAs.
The last time that happened (mid-February), you’d have been justified in taking a bullish position on CMG stock, which would’ve triggered around the $483 mark. Given perfect timing, you could’ve ridden that to $540 around March 7 and dumped it. Given more realistic timing, you could’ve taken the bearish breach of the 20-day SMA around March 9 as a sign to dump shares and gotten out around $510.
In other words, using very conservative rules around SMAs (get in when shares trade above both the 20-day and 50-day SMA, get out when they break below the 20-day), you could’ve made 6% in 23 days. That’s about 140% on an annualized basis, and even more than that if you’re playing conservative options. Not too shabby.
Will Chipotle eventually recover from its health crises? Probably. Am I willing to wait on it in the meantime? Nah, not I.
But given the stock’s recent volatility — and religious adherence to the 20-day SMA line — CMG stock is a wonderful play for technical traders.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
