Chipotle Stock Is Testing 2015's All-Time High

Chipotle Mexican Grill, Inc. (CMG) has nearly completed a long and painful round trip back to the August 2015 high at $758.61, posted just before customers all across the country were rushed to hospitals with foodborne illnesses later attributed to company sterilization practices. A long period of denial and deflection followed the outbreak while sales dried up, dumping the fast food chain to a five-year low in February 2018.

Time heals all wounds, and Chipotle's customers have finally returned, which accounts for the stock's astounding 500-point 15-month recovery wave, but old highs mark major resistance, so it isn't wise to expect an immediate breakout and rally to $1,000. That's good news for sidelined investors because a reversal could fill February's gap at $550 before developing the firepower needed to sustain higher prices.

CMG Long-Term Chart (2006 – 2019)

Parent McDonalds Corporation (MCD) spun off the restaurant chain in a January 2006 initial public offering (IPO) that opened at $45.00. Early buying pressure peaked in the mid-$60s in May, marking resistance ahead of a 2007 breakout that attracted strong momentum buying interest. The stock surged higher into year end, finally topping out above $150 and turning lower into the first quarter of 2008. Selling pressure accelerated during the economic collapse, cutting through the IPO opening print before posting an all-time low at $36.86 in November.

The subsequent recovery wave took 19 months to complete a 100% retracement back to the 2007 high, yielding an immediate breakout that posted healthy upside into 2012 when the uptick ended above $400. It cleared that resistance level in the fourth quarter of 2013, generating a final assault into the 2015 all-time high, followed by a brutal decline that relinquished more than 350 points in just three months.

The downtrend settled near $350 in 2016, giving way to a modest uptick that failed at 50-month resistance in May 2017. That set the stage for a high-volume selling climax that continued into the first quarter of 2018. The stock turned higher into April and gapped up more than 40 points after the company reported higher-than-expected customer growth. It lost ground through the second half of the year but turned higher once again in January, continuing an ascent that has now reached within 10 points of the 2015 high.

The monthly stochastic oscillator lifted into the overbought zone in March and has crossed over but hasn't issued a sell signal yet. Price action is now working on a monthly bullish outside candlestick that, if confirmed at the end of June, will greatly improve odds for a third quarter breakout, However, accumulation readings warn that Chipotle shares will need even stronger sponsorship to hold onto higher prices.

CMG Short-Term Chart (2015 – 2019)

The on-balance volume (OBV) accumulation-distribution indicator posted an all-time high with price in 2015 and entered a brutal distribution wave that continued into August 2017. Price continued to lose ground for another six months, setting off a bullish divergence that predicted the eventual bottom. Buying pressure since that time has failed to match price's intensity, stalling at the .786 Fibonacci retracement level of the 2015 into 2017 distribution event. In turn, this predicts that the rally will stall and enter a consolidation period before a sustained breakout.

The 15-month uptrend has carved three unfilled gaps at $275, $350, and $550. The odds are high that at least one of these holes will get filled before a rally to new highs gains traction. As a result, patient market players will be setting their sights on the February 2019 continuation gap between $530 and $570, looking for a low-risk buying opportunity. Of course that's a problem for current shareholders, who might be forced to sit on their hands through a 25% to 30% decline.

The Bottom Line

Chipotle stock is now testing 2015's all-time high but is likely to fill at least one of three rally gaps before breaking out and heading toward $1,000.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.