Chipotle Mexican Grill Rally May Be Over

Chipotle Mexican Grill, Inc. (CMG) shares fell more than 500 points in the two and a half years following the 2015 disclosure of a food poisoning outbreak, with the recovery hampered by a series of self-inflicted wounds. The stock finally bottomed out in February 2018 after testing the 2012 low near $250 and nearly doubled into June's high at $474. Last week's 20-point sell gap may signal the rally's end, with significant downside likely while the stock works off overbought technical readings and fills April's massive gap between $340 and $386.

The four-month rally reversed within 25 points of the May 2017 high near $500, but the failure to complete the last leg of a 100% round trip may be significant because the high-volume reversal cut through the .786 Fibonacci retracement of the decline into 2018. Turnarounds at that harmonic price level have nasty reputations for ending rally waves dead in their tracks and generating lower highs within long-term price patterns. (See also: Chipotle: Rise, Fall and Revival of a Wall Street Darling.)

CMG Long-Term Chart (2006 – 2018)

The stock spun off from parent McDonald Corporation (MCD) in January 2018, opening at $45.00 and entering an uptrend that topped out in the upper $60s four months later. That marked the highest high into a May 2007 breakout that attracted intense buying interest, lifting the fast food darling to $155.49 on the last trading day of that year. It turned south during the bear market, giving up those gains into November 2008, when it bottomed out at an all-time low in the mid-$40s.

An 18-month rally into the prior high yielded a tight 2010 consolidation pattern, followed by a dramatic breakout that posted excellent returns into August 2014, when buying pressure eased just below $700. The stock posted two normally higher highs into August 2015's all-time high at $758 and carved a small double top pattern, ahead of an October breakdown triggered by nationwide reports of sick customers.

Selling pressure eased near $350 in October 2016, yielding a recovery wave that added nearly 150 points into May 2017. Aggressive sellers returned at $500, triggering a nasty reversal that broke 2016 support before heading into February 2018's selling climax at 247.51. Committed buyers returned in the following weeks, generating a rally to base resistance near $350, followed by an April continuation gap that marked the halfway point of an uptrend that may have ended at $474 last month.

CMG Short-Term Chart (2016 – 2018)

The stock spent seven months carving a basing pattern after breaking through the 2016 low in July 2017, ahead of April 2018's breakout. A Fibonacci grid stretched across the selling wave into February 2018 highlights hidden resistance at $375, $400 and $450. The breakaway gap mounted the first two levels, while the advance reached the third level in May 2018 and mounted it three weeks later. The reversal puts that resistance level back into play, with selling pressure likely to increase if the stock tries to fill the gap between $440 and $460.

A long-term Fibonacci grid across the multi-year downtrend places the .382 selloff retracement level right at last week's reversal, in perfect alignment with the .786 retracement of the smaller wave. This adds weight to a reversal call, indicating that the stock will now head into a broader consolidation and basing pattern that could last well in 2019.  The next buying opportunity in this price structure should come when a pullback enters the gap, with a strong bounce supporting trading profits while giving bulls an opportunity to wrest control of the longer-term tape. (For more, see: Chipotle Shares Sink After New Changes Revealed.)

The Bottom Line

Chipotle Mexican Grill shares may have completed a recovery rally off February's multi-year low, setting the stage of months of sideways action while the stock completes a longer-term bottom. (For additional reading, check out: These 3 Hated Stocks Are Beating the Market.)

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