Chipotle Mexican Grill, Inc. (NYSE:CMG) shares are back in fashion. After last month’s earnings home run, momentum traders are salivating over the food stock, antsy to take a bite. The hope is that CMG will reclaim some of its former glory by continuing the newfound uptrend.
Based on the price action in recent weeks, I think these hopes have high odds of fulfillment. Let’s chronicle Chipotle’s progress.
For the past few years, CMG has been a dog of a stock, plagued by bad news. Monster gaps and volatile swings became commonplace, giving little reason for sane traders to get involved. With last quarter’s robust earnings and the resulting moonshot in its stock price, however, the worst may be over.
Earnings gaps often serve as catalysts for new trends. They reflect a rapid re-pricing as Wall Street tries to discount the positive change in one fell swoop. Fortunately, the good vibes delivered by the price jump tend to linger, delivering further gains in the weeks following the gap. It appears that’s the script that CMG stock is now following.
Even though the stock pole-vaulted a jaw-dropping 24% in one day, it hasn’t given back an inch of gains in the three weeks since. Its ability to absorb any and all selling pressure has been admirable. The churning has now created a high base that could deliver an upside breakout in the coming days.
Watch for a break above $433 to signal the next upswing is upon us.
A Tasty CMG Trade
Traders seeking exposure to food stocks should consider CMG a top pick. And don’t let its lofty price tag deter you. The options market provides many ways to acquire bullish exposure on the cheap.
If Chipotle can take out resistance, then buy the July $430/$450 bull call spread for $9 or better. The risk is limited to the initial cost, and the reward is limited to $11.
CMG stock options aren’t that liquid so make sure to use limit orders.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
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