Flagging Restaurant Stocks Look Less Than Appetizing

By Joey Fundora | September 22, 2010 AAA

Restaurant stocks have been one of the strongest groups over the past year as stocks like McDonald's (NYSE:MCD), Yum! Brands (NYSE:YUM) and Chipotle Mexican Grill (NYSE:CMG) have moved to all-time highs. There was a real fear that many restaurant stocks would suffer through the recession and while many names are trading much lower, as a whole this sector has been trending higher for almost two years. But despite this group's strength, it doesn't really garner the same level of attention from the media that other market leaders receive.
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Chipotle Mexican Grill (NYSE:CMG), for example, has proved to be a clear market leader. CMG had been in a consolidation through most of the summer, while the markets were threatening to break down. CMG then broke out of its base well ahead of the markets in September, and is now building a flag above its breakout area. Whether CMG can clear this flag now or not, it is clear that it is one of the strongest stocks in the market right now.

Source: StockCharts.com

While many traders may be aware of CMG and its strength, other restaurant stocks like BJ's Restaurants (Nasdaq:BJRI) have also been performing well. While many of these are not already above their bases like CMG, they are building flags after clearing important resistance levels. BJRI has been building a base since April and recently cleared some resistance levels near $26. While the base for BJRI is not perfectly defined, there is a clear level of resistance just under $28. BJRI is currently flagging just under this level; a move above the flag could lead to a break above the entire base.

Source: StockCharts.com

Cracker Barrel Old Country Store (Nasdaq:CBRL) is another restaurant stock building a flag just under key resistance levels. CBRL was trading in a well-defined channel over the past few months until recently breaking out of that range. It has begun to flag in the $50-$51 level. A breakout from the flag could lead to a break above the more important resistance level of $53.

Source: StockCharts.com

Darden Restaurants (NYSE:DRI) also recently cleared resistance as it broke above the neckline of an inverse head and shoulders it has been building since May. DRI was able to clear pretty significant resistance around $44-$45 and is now flagging at that level. DRI's prior high was just above $48; a move above the flag should lead to at least a retest of this level.

Source: StockCharts.com

The Bottom Line
Other stocks in this sector, such as DineEquity (NYSE: DIN) and Krispy Kreme Doughnuts (NYSE:KKD), are also showing similar flag patterns. Because institutions often accumulate a basket of stocks in a specific sector, traders should always be on alert when a pattern is found across multiple stocks. The bull flag is a bullish continuation pattern, and these stocks are all building this pattern after clearing important resistance levels. While not all flags are resolved to the upside, traders should be on high alert as this pattern often results in a sharp move once it is cleared.

Do you think these stocks can break out of their flags? Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

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