Chipotle: It's a Thin Line Between Love and Hate

 | Jul 13, 2017 | 11:15 AM EDT
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There are few companies, and their stocks, that investors love to love, then hate, then love, etc. more than Chipotle Mexican Grill (CMG) . Sadly, as is the case with our human condition of buying while in high emotional states and selling in low emotional states, our herding behavior regularly causes us to buy when we should be selling, and sell when we should be buying.

Members of our Trading Room and DSE Alerts services were warned early yesterday (CMG around $393) that those with profitable short positions from the May 2 sell signal, should use buying actions to protect those profits in the $390s. These actions included using buy stops to protect shorts, or even just buying to cover. From $480 that day, nine weeks ago, CMG has now reached $390 for an 18% slide. And, as to be expected, investors hate it again.

This is the daily bar chart of CMG, showing the decline from the May swing high to current levels. While there are several different paths that prices can take to their green zone support, given on May 2 as $340 +/-$15, the current oversold conditions no longer indicate selling actions are optimal. Rather, a dead-cat bounce into the pink sell box surrounding $430 +/-$15 could begin at any time. Even if prices manifest the remainder of our DSE's (decision support engine) blue arrow forecast into the bull's eye, now is not the time to make that bet, like it was back up near $500.

Why not?

Using just a couple of DSE's dozens of objective, empirical indicators, we can see the daily stochastics are at the 10% extreme oversold threshold. This is the polar opposite of where selling actions should occur. This where buying actions should be contemplated; buy to close and take profits or buy stops to protect profits from evaporating.

Once prices get to the green zone, they'll test the lower two-standard deviation band (olive/gold line), which controls 95% of normality. Then, buying actions will include getting net long in your exposure to CMG, rather than just exiting and/or protecting shorts.

With another 10% drop unable to be negated, yet, however, patience is the prudent plan. This conclusion is strengthened further by examining the weekly bar chart (not shown here), which also shows stochastics at the 10% oversold extreme. However, neither the short-term (5-13 days), nor the intermediate-term (5-13 weeks) degrees of trend have turned up yet. So, further downside action is likely before a meaningful, multi-month low is in place.

The beauty of the DSE is that is doesn't factor in any news or other external inputs. It's solely, empirically, and objectively price-behavior driven. How important was our May 2 exit warning? If you read it but didn't act, you and only you can judge how much you wish you'd have acted.

Remember, it's not our message. We have no vested interest in stocks rising or falling at any given time. We seek clarity about risk/reward situations. When there's no clarity, confusion exists, and human emotions fabricate reasons to act. However, from confusion comes clarity. Then, from clarity comes confusion. DSE warns when the strength of our clarity is weakening, and about to morph back into confusion -- over and over.

Now, DSE suggests the following actions. If short, use buying actions to cover shorts, partially cover shorts, or use buy stop orders to protect profits. If flat, use buying actions in the $390s to establish initial long exposure, while eyeing the $340 +/-$15 zone for additional purchases. This could produce an average cost in the $370 range. Then, the rise from there, or even here without a lower low, will have meaning as CMG shares progress along their path to the pink sell box above, perhaps 15%-18% in the coming few months.

"If it ain't broke, don't fix it" has become our motto here at Therefore, we continue to act as mechanically as possible and use buying actions when indicated, and selling actions when indicated. While not perfect, most of errors comes from human greed and jumping the gun before signals like the one above are fully triggered.

In CMG's case, if you can't enter here and have the patience and capital to add into the green zone, then just await the green zone. Only you know yourself well enough to make that decision.

For updates on this analysis, as well as other trading opportunities, try Ken Goldberg's DSE Alerts service for free for a couple of weeks, or contact him at support@dsetrading.

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