While the broader investor appetite for shares of Chipotle Mexican Grill, Inc. (NYSE:CMG) remains lousy through an 18-month lens, CMG stock has quietly rallied 23% year-to-date and and looks constructive for another leg higher in the near-to-intermediate-term.
It doesn’t take looking back too far to remember a time when Chipotle Mexican Grill was one of the hottest stocks on Wall Street. Stock analysts were uber-bullish on the millennial generation’s appetite for a more health-conscious burrito, and the momentum seemed unstoppable.
While the millennial story may still remain intact, the upside momentum in CMG stock came to an abrupt halt in October 2015 as the company was hit with a series of E. coli cases at a number of its restaurants. This understandably led to a drop off in sales and a broader PR headache for the company.
While the tailspin may to a large extent have run its course, that has yet to be reflected in the stock price. Sure, the momentum-chasing spirit in CMG stock may be gone and analysts are no longer flashing rock-star-bullish reports on the company’s growth prospects. But that coupled with what I am about to show you on the charts may in fact be a bull case in itself.
I just returned from a two-day trading and investing workshop I hosted in Boston. One of my focus points was to teach my clients the importance of respecting trends in various time-frames in the stock market and being willing to change one’s mind and admitting being wrong if a stock price goes in the undesired direction.
In that vein, there surely are plenty of active investors and traders who stubbornly remain holders of CMG stock as a result of having chased it higher in 2015 and not having exited upon a clear and vicious trend break that followed in the fourth quarter of 2015. Simply put, much pain can be avoided if one simply respects major trend breaks.
CMG Stock Charts
On the multiyear weekly chart we see the sharp drop in CMG stock that began in October 2015 lasted an entire year until it finally exhausted the sellers. While the multiyear up-trend remains largely broken and the stock in May found resistance at the blue 100 week moving average, the stock has over the past seven months has developed a more constructive pattern.
On the daily chart we see that a consolidation pattern began to set in during the summer of 2016, which without too much imagination could be looked at as an ‘inverse head and shoulders pattern.’ Bullish patterns such as this are important technical signals that can lead to high-probability setups, and for those unfamiliar, I’ll be hosting a special webinar June 15 for InvestorPlace readers to explain these signals and how to turn them into winning trades.
On the daily chart, we see that the “neckline” of this formation (black line) broke in March and the stock then released higher. After getting near-term exhausted, however, by mid-May the stock has so far pulled back 10% in what looks to be an orderly consolidation move.
From here, I am once again interested in buying the stock upon a next bullish reversal. Important to keep in mind, however, is that the previous breakout area, i.e. resistance around the $430 area may still first need to be re-tested before such a bullish reversal and thus a better buy signal can come to fruition. Nonetheless, given the stock market’s positive correlation of late I would be willing to buy CMG stock upon any meaningful two-day rally, which then would make the $500 the next upside target again.
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