Shares of Mexican food chain Chipotle Mexican Grill, Inc. (NYSE:CMG) have seen choppy trading thus far in 2015, and in the process developed an increasingly concerning technical pattern. Active investors and traders have a well-defined level of support to watch — and if CMG stock slips below it, that could open up a lot of downside.
It has been one heck of a ride for investors in Chipotle Mexican Grill over the past half decade as the company not only became a major player in the fast-casual segment of restaurants, but arguably defined the entire group.
Chipotle earnings reported on the evening of Feb. 3 came in mixed, causing CMG stock to drop. Momentum darlings like Chipotle are under constant pressure to please investors with continued growth, and even the slightest signs of a slower rate of growth can quickly put a dent in the stock.
CMG Stock Charts
Looking at the multiyear weekly chart of Chipotle stock, we see a defined line of support and a clear line of resistance. Each time CMG gets overextended, it tends to mean-revert lower.
So far, the only major correction in Chipotle took place in 2012 when CMG dropped more than 40%, which in the bigger picture simply consolidated the sharp 2009-12 rally. The stock has since risen another 200% into its January 2015 top, and the longer this continues, the more susceptible the stock becomes to another more notable ‘corrective’ move lower.
The price action over the past couple of years is shaping CMG stock into a big rising wedge pattern, which has a good tendency to ultimately push it into a mean-reversion move lower.
On the daily chart, the more near- and medium-term price action has become concerning. After an up gap in July 2014, CMG stock largely settled into a sideways consolidation pattern. Then on Jan. 8, CMG gapped higher and past its summer 2014 highs and consolidated again. Finally, CMG meaningfully gapped lower again after the February earnings report, thus classifying the January breakout as a fake-out move and completing what we refer to as an island top pattern. (The island top pattern is the price action from the January up-gap to the February down-gap.)
Since the post-earnings selloff, CMG has once again began to consolidate, but now has a significant amount of headwind to overcome with the development of the island top.
On the downside, the support level to focus on is the Feb. 9 low near the $647 area, which now also matches up with the rising 200-day simple moving average (red line) as well as the big-picture support line from the above multiyear chart. Active investors could look to short CMG stock on a daily close below $647, which could then lead to a next leg lower toward the $600 area.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.