Chipotle Surges to 3-Year High After Strong Quarter

Chipotle Mexican Grill, Inc. (CMG) stock surged to a three-year high on Wednesday evening after the company beat fourth quarter expectations by healthy margins and reported a 6.1% increase in comparable restaurant sales, driven primarily by higher menu prices. The 17% operating margin marked a 21% year-over-year increase, indicating that profitability at the fast food giant could grow well into the new decade.

The post-news surge mounted harmonic resistance at the .618 retracement of the 2015 into 2018 downtrend near $560, predicting that buying power could now fill the November 2015 gap near $630. The rally finally slams the door on a troubled period that began in 2015 with nationwide reports of sick customers while setting the stage for gains that could eventually bring the all-time high above $700 into view.

CMG Long-Term Chart (2006 – 2019)

Long-term technical chart showing the share price performance of Chipotle Mexican Grill, Inc. (CMG)

The company came public as a McDonald's Corporation (MCD) spinoff in January 2006, opening in the mid-$40s and dropping into a trading range that broke to the upside in March. It stalled quickly in the mid-$60s ahead of a 2007 breakout that attracted strong momentum buying interest, adding points at a rapid pace into the December high at $155.49. That marked the highest high for the rest of the decade, ahead of a downturn that accelerated during the 2008 economic collapse.

The decline cut through the IPO opening print, dropping the stock to an all-time low at $36.86 in November while marking a historic buying opportunity, ahead of a recovery wave that gathered steam in 2010. It completed a round trip into the 2007 high and broke out in September, entering a powerful trend advance that more than doubled the stock's value into the 2012 peak at $442.40. A 2013 breakout above that level settled into a more shallow trajectory but continued to add points into the August 2015 all-time high at $758.61.

Stories about sick customers spread through the financial media like wildfire that month, triggering a rapid 50% haircut before easing into a basing pattern that yielded a single healthy bounce, ahead of a 2017 breakdown that dropped the stock into 2012 support around $250 in February 2018. Gains since that time have now recouped more than two-thirds of the multi-year downtrend while accumulation has returned to healthy levels.

The overnight rally also signals a major breakout above the three-year inverse head and shoulders basing pattern (green line), generating a measured move target above the 2015 high. Meanwhile, the monthly stochastics oscillator has flipped into a buy cycle that hasn't reached the overbought level yet, predicting relative strength into the second quarter. Taken together, these bullish elements tell us that the stock could eventually break out to an all-time high.

CMG Short-Term Chart (2017 – 2019)

Short-term technical chart showing the share price performance of Chipotle Mexican Grill, Inc. (CMG)

The on-balance volume (OBV) accumulation-distribution indicator has now lifted to the highest high since December 2015 after hitting an all-time low less than one and a half years ago. This rapid accumulation bodes well for additional gains that could eventually escalate into a full-blown momentum bid. However, it will still take considerable buying power for this volume measurement to complete a round trip into the August 2015 high, posted at the same time as price.

However, the stock has now gained nearly 200 points and risen more than 50% in the past seven weeks, setting off all sorts of short-term overbought signals. This type of vertical action builds shareholder complacency, often triggering shakeouts and whipsaws designed to separate weak hands from their money. As a result, mixed action could develop in the sessions following this morning's big opening print, denying easy profits to newly minted bulls.

The Bottom Line

Chipotle stock is set to open 10% higher than last night's closing print following a torrid buy-the-news reaction to healthy fourth quarter earnings and a bullish 2019 outlook.

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

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