Chipotle Mexican Grill, Inc.: CMG Stock Is Begging to Bounce

Chipotle Mexican Grill, Inc. (NYSE:CMG) has taken a beating over the past few weeks of trading, but while it’s lower for the year to date, in the bigger picture, CMG stock remains range-bound. Headline news from worrisome earnings to an E. coli outbreak scare have knocked Chipotle stock back to the very lower end of its 16-month range, where a bounce looks increasingly likely.

Active investors could express a near-term bullish view via the stock itself of using options.

Beat the BellAfter the close of trading on Oct. 20, Chipotle reported Q3 results. Revenue increased by 12%, net income was up 11% and comparable restaurant sales increased 2.6%. The company’s operating margin, however, slightly narrowed; Chipotle opened 53 new restaurants in the quarter. Investors quickly sold the stock lower to the tune of nearly 6% the following day, breaking initial technical support and setting a further decline in motion.

In early November, news broke that Chipotle was forced to close 43 restaurants in Oregon and Washington state on the back of an E. coli scare as people fell ill after eating at Chipotle establishments, driving shares even lower.

CMG Stock Charts

As we can see on the multiyear weekly chart and as a result of the recent string of bad news, CMG stock last week reached a fresh 52-week low, which through this lens however coincided with good horizontal support dating back to 2014. While the bears will point out that shares also dropped and closed below their blue 100-week moving average, horizontal support in the near- to medium-term stands a good chance of helping the stock for a bounce.

CMG stock chart weekly
Click to Enlarge

On the daily chart, note that through the lens of the MACD momentum oscillator the stock is currently deeply oversold, as the indicator is at levels last seen in 2012. Last Friday at one point, the stock was down by another nearly 4% on the back of a broker downgrade. CMG stock, however, managed to rebound and closed the day at the highs of the session.

As a result of Friday’s initial weakness in the stock, it had successfully retested and marginally undercut the summer lows before turning back up. Through the lens of technical analysis and investor psychology, last Friday’s price action was a bullish reversal as bears failed to keep Chipotle lower.

Certainly one day is not a trend, but when a bullish reversal takes place at multiyear support, I sit up and take notice.

CMG stock daily
Click to Enlarge

Active investors could look to buy some CMG stock around current levels for an initial move back into the $640 area and a stop loss on a daily closing basis at last Friday’s lows. Alternatively, investors could sell out of the money put spreads, or wait for a follow-through buying day before buying some stock.

Like what you see? Sign up for our daily Beat the Bell e-letter and get investment advice delivered to your inbox every morning!

Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.

More From InvestorPlace

Article printed from InvestorPlace Media,

©2021 InvestorPlace Media, LLC