Chipotle Mexican Grill, Inc (NYSE: CMG), which has been a major market leader in recent years, closed out 2015 on a low note. After climbing an incredible 1,160% from October 2008 to October 2015, the stock has fallen 38% in the last three months after an E. coli outbreak send sales plummeting 20%.
To make matters worse for Chipotle shareholders, the stock started off 2016 by inflicting some major technical damage to its chart. Here’s a look at just how bad Chipotle’s technical picture is and the key levels traders should be watching.
There’s plenty of bad news to go around when it comes to Chipotle’s technical picture. To start, the stock experienced a death cross in late November and has been trading well below both its 50-day and 20-day simple moving averages (SMAs) ever since.
The stock cut through potential support at the $600 level like a hot knife through butter and has shown very little hope that it is near a bottom to this point.
However, the stock’s latest drop to $447 marks a breakdown below the $470-$480 level that served as support all the way back in 2014 and marks new multi-year lows for Chipotle.
For Chipotle bulls, there are at least a couple of reasons to maintain optimism that the stock will make a comeback at some point soon. First, the fall to $447 means that finally, more than two years later, the stock filled the gap created in its chart in October 2013.
Technical analysts know that stocks tend to fill all gaps in their charts in time, but the red-hot Chipotle never filled its October 2013 gap in the $450-$470 range on its march to $750 until this week.
Secondly, there is precedent for a pullback this large in Chipotle’s past. As recently as 2012, Chipotle experienced a 47% retracement from $442 to $233. If the current selloff reaches the magnitude of the 2012 pullback, Chipotle might find support at around the $400 level before resuming its longer-term uptrend.
In the short-term, traders need to be watching for any breakdown below $442, the stock’s previous peak back in 2012, as a sign that Chipotle could be headed for $400. If the stock breaks below $400, there appears to be very little support until below $250.
And of course, there’s not a single chart formation that can convince customers to eat at a restaurant with E. coli in the food, so Chipotle needs to put this outbreak in the rear-view mirror as soon as possible.
Disclosure: the author has no position in the stocks mentioned.
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