How Chipotle Mexican Grill, Inc. Will Rally Another 10% (CMG)

Chipotle stock is acting defiantly, and the smart-money crowd could push CMG shares even higher

Shares of Chipotle Mexican Grill, Inc. (NYSE:CMG) rallied 1.74% on Monday in what otherwise was a fairly muted trading session for U.S. stocks. The rally in Chipotle stock came on the back of news that the company will roll out the new “chorizo” menu to its restaurants nationwide.

Beat the Bell: Chipotle Mexican Grill, Inc. (CMG)While I have my doubts that this alone will help get masses of new customers into the stores, CMG shares increasingly look ripe for a better move higher. Chipotle is expected to report its next batch of earnings on Oct. 25 — a date that traders and investors should circle on their calendars.

Before looking at Chipotle’s stock charts, it’s worth reminding everyone that Bill Ackman announced a nearly 10% stake in CMG stock on Sept. 6. He believes Chipotle is undervalued.

Now that a large hedge fund is behind this company and could force change, more than a few smart-money investors I have spoken to feel inclined to look at Chipotle stock from the long side. Very simply, because the hedge fund community works in crowds, when a heavyweight like Bill Ackman announces a bullish view in a stock like Chipotle, it can quickly lead to a stampede once price action begins to confirm that view.

Chipotle Stock Charts

With that in mind, let’s note that CMG — as a result of its 50% haircut from the highs of 2015’s second half through the lows from this past summer — has re-tested and marginally undercut its well-defined 2009 support line (red dotted line). While this isn’t bullish, Chipotle stock is holding on.

From a momentum perspective — per the Relative Strength Index (RSI) in blue at the bottom of the chart — note that we’re seeing some positive divergence. Price has stalled sideways, while the RSI is forming a series of higher lows since early this year.

This speaks to potential price appreciation in CMG stock in coming weeks, maybe months.

Chipotle stock chart weekly CMG
Click to Enlarge

On the daily chart, we see that CMG stock this summer came dangerously close to breaking below its January lows and slipping into another selling spree. However, support never broke, and selling pressure simply waned.

The way I read this “support” is that sellers simply lacked the ammunition to break Chipotle’s back. In other words, sellers ran out of steam around the high $300s, and an underlying bid supported Chipotle stock.

Chipotle stock chart daily view CMG
Click to Enlarge

Over the past few trading sessions, Chipotle stock has once again pushed back to the upper end of a multi-month trading range, leaving yet another selling spree by the bears in the first half of September unsuccessful. The longer CMG can hold this multimonth support area and ultimately push above the $440 area, the better the odds of a move into the high $400s in coming months.

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