Chipotle Mexican Grill, Inc. (NYSE:CMG) dropped steeply after last week’s earnings report, and the selloff now has Chipotle stock teetering on increasingly thin support.
As a result, active investors and bearish traders should be salivating at this chance to play CMG on the short side.
When Chipotle Mexican Grill reported is latest financial results last Tuesday, earnings of $3.88 per share beat the consensus mark, but its top line of $1.09 billion came in just below analyst estimates of $1.1 billion.
With fast-growing issues like Chipotle stock, investors tend to focus on sales, so the disappointment there is surely what weighed on CMG shares after the report. To be sure, revenues still grew, as did same-store sales, which were up 10.4% on a year-over-year basis. Even Chipotle’s operating margins increased to 27.50%, but analysts seemed firmly focused on the weaker-than-expected sales figures.
To give us some context around the question of “What now?” let’s look at the charts.
Chipotle Stock Charts
Starting off with a multiyear look at the weekly chart of CMG below, we can see that Chipotle’s sharp rally since October 2012 has taken place in an orderly fashion; each overbought reading has led to a retracement back to the black uptrend line.
At the same time, however, the ascent since late 2013 has come on waning upside momentum, as measured by the Relative Strength Index (RSI) at the bottom of the chart. Furthermore, as we will see better on the daily chart below, Chipotle stock since late summer 2014 has arguably began settling into a topping process that — as a result of last week’s post-earnings selloff — brought it back down to the 2012 uptrend line for the first time in about 12 months.
On the daily chart, we see that after CMG stock gapped higher last July, it began settling into a bigger-picture consolidation phase. In January, however, shares gapped higher again, traded sideways for a few weeks, then gapped lower again in early February. This has marked the chart with that we refer to as an island top (blue box), which typically has bearish implications.
Last week’s post-earnings drop pushed the stock again below a horizontal support line (black line) and deeper below its rising 200-day simple moving average (red line). I would also point out the spike in volume, both from the early February selling as well as last week.
With Chipotle stock showing plenty of weakness here, a drop below last week’s trading lows near $634 could open up a nice opportunity to sell CMG short or buy put options for an initial move into the $590 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.
