Chipotle Mexican Grill, Inc. (CMG) gained substantial ground in an April buying spree that lifted the stock off deep downtrend lows reached in the aftermath of the 2015 food poisoning scandal. Corporate misfires delayed a 2016 recovery, generating a 13% year-over-year revenue decline, but management has finally turned the corner in a rebirth that could add another 100-points in coming months.

The recovery wave stalled just under $500 in late April after the company beat first quarter 2017 earnings estimates by 31-cents per share and reported a 28% revenue surge. While those metrics were sub-par compared to the company’s glory days, it’s likely that overbought technicals ended the advance rather than quarterly results, which are finally they’re moving in the right direction.

CMG Weekly Chart (2006–2017)

CMG

The stock came public as a McDonald's, Corp. (MCD) spinoff in January 2006, opening at $45 and dropping into a narrow consolidation, ahead of a March breakout and uptrend that continued into the December 2007 high at $155.49. It rolled over in early 2008, entering a decline that accelerated during the economic collapse, with selling pressure easing after the stock posted an all-time low at $36.86 in November.

The subsequent recovery wave unfolded at the same trajectory as the prior decline, lifting the stock in a V-shaped pattern that reached the 2007 high in June 2010. It consolidated at that resistance level into the fourth quarter and broke out, entering a trend advance that eased into a rising channel in 2011. The uptrend posted higher highs in the 2012 peak at $442 and gave way to an orderly correction that set the stage for a test at the rally high in November 2013.

It broke out once again, gaining ground into the August 2015 all-time high at $759 and then selling off at an aggressive pace as the impact of the food poisoning outbreak shook the confidence of long-term shareholders. Misstep followed misstep into the second half of 2016, dumping the stock to a 3-year low at $352 in November, ahead of a minor recovery wave that completed a basing pattern and March breakout at $435.

Price action since 2009 has generated a rising lows trendline that held support during the 2012 correction. It bounced at that level once again in the first quarter of 2016 while the subsequent downturn broke support, triggering climactic selling pressure. The stock remounted that level in March 2017, setting off long-term bull signals but it still hasn’t tested new support between $460 and $470. That may be required before the stock attracts fresh buying interest.

CMG Daily Chart (2015 -2017)

CMG

A Fibonacci grid stretched across the downtrend organizes price action that highlights continued weakness under the surface. For starters, the bounce still hasn’t pierced round number resistance at $500 or the .386 selloff retracement level. Also, it hasn’t reached the 2016 swing high at $542, which is needed to end the string of lower highs and confirm a new uptrend. Also note how the 50-day EMA is rising into the multiyear trendline, adding importance to a test between $460 and $470.

On Balance Volume (OBV) fell to a multiyear low in the second half of 2016 while the March 2017 breakout also broke the trendline of lower-highs (red line). This upturn sets off a bullish signal even though the indicator hasn’t lifted far above the deep low. It also highlights growing institutional bottom fishing interest, as evidenced by Perishing Capital’s 2.8-million share stake. Taken together, it also supports additional gains, at least to the swing high above $540.

The Bottom Line

Chipotle has rallied more than 30% so far in 2017, caught in a recovery wave that should signal the end of its long and painful downtrend. However, it's unwise to expect a full or fast recovery so market players should expect two-sided action that tests new support before the stock builds on already impressive gains.

<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.