Scandalized restaurateur Chipotle Mexican Grill Inc (CMG) caught a little love on Thursday morning in reaction to a Wedbush upgrade that expects the company’s shifting focus from sales recovery to improved margins to bolster its bottom line. Even so, their conservative $400 price target suggests a lack of faith in the 2017 outlook since the stock closed just 18-points under that level on Wednesday evening.
The company has failed to rebuild its customer base after a well-publicized 2015 food poisoning outbreak, with management adding to woes by making a series of tactical errors in dealing with the backlash. Even so, it’s now 2017, with the January Effect underpinning speculation in the prior year’s biggest losers. This tailwind could trigger a recovery that exceeds analyst and management targets.
CMG Long-Term Chart (2006-2017)
The stock came public in the mid-40s in January 2006 as a McDonald's Corp (MCD) spinoff and broke out of a trading range 16-months later, lifting in a steady uptrend to the January 2008 high at $155.49. A decline gathered strength in the second half of the year, dumping to an all-time low at $36.86 in November. It took nearly 18-months for the subsequent recovery wave to complete a 100% retracement to the prior high and another five months to generate a breakout.
That uptrend built steady gains into April 2012 when it topped out at $442, with the subsequent pullback giving up more than 200-pts into the October low at 234. It turned higher into 2013, reaching the 2012 high in October and breaking out in a buying impulse that continued into the second half of 2015 when food poisoning reports spread across the national media. The rally ended at $758 in August, yielding a steady decline that found support near $400 in January 2016.
Last year’s January Effect attracted steady buying pressure, lifting the stock to $542 in March, with aggressive sellers then returning and dumping price into a declining wedge that’s still in force ten months later. Meanwhile, Fibonacci grids placed over the two primary rally waves since the IPO broadcast continued downside exposure through $350, telling observant market players to take place tight stops and take aggressive profits after the recovery wave loses steam.
Short-Term Chart (2014-2017)
The stock printed a downside breakaway gap in October 2015, exiting a three-month topping pattern while entering a steep downtrend that accelerated into the January 2016 low. The first quarter bounce stalled at the .386 selloff retracement but well below the declining 200-day EMA. In fact, the stock hasn’t touched this long term moving average since the gap, highlighting extreme weakness consistent with a paradigm-shifting loss of confidence.
A rally above $400 is needed to break the falling wedge and put the 200-day EMA at $425 in play. Those barriers, relatively close to the current price level, tell us that a recovery wave similar in scope to the 2016 bounce will require a lot more firepower. It’s a two-edged sword because, while the setup lowers odd for a high percentage rally, breakouts will ease highly negative sentiment and attract sidelined players who have no intention of owning the stock at current levels.
On Balance Volume (OBV) looks more bearish than the dismal price pattern, failing to bounce strongly in the first quarter of 2016 despite the significant rally. It’s eased to lower ground in the last year in an endless series of lower highs and lows that have drawn a descending channel (red lines). These mark important levels to watch if buying pressure sets into motion and lifts the stock toward $400.
The Bottom Line
Chipotle Mexican Grill could gain significant ground in a January Effect rally similar to 2016’s 140-point bounce, but the stock needs to mount two major resistance levels, at $400 and $425, to set that trade into motion.
<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>