CMG Challenges Weekly Resistance on Daily Divergences

Jun 11, 2010: 11:31 AM CST

Now this is interesting – Chipotle Mexican Grill – CMG – is currently a popular, high-flying restaurant stock that I’ve been hearing mentioned around the Trader’s Expo here in Los Angeles.

Naturally, I had to take a look at the chart.  It’s at a very interesting inflection point, and it warranted a blog post to highlight the current chart structure.

Let’s start with the Weekly Chart to see that CMG is bouncing up into a prior long-term price high:

The long-term pattern is similar to a “Mirror Image” reversal, or a “V-Spike” reversal (reference the bottom in November 2008).

Price has completed a full retracement back to the prior $150 per share high achieved in December 2007.

Chartists often reference major prior price highs as key levels to watch that could form current resistance – that means we don’t want to load the boat with CMG shares while we’re under this level, and only get long above the level.

That’s not saying that price has to come down here – but that it’s probably a better play from a risk/reward standpoint to “wait and see” who wins the battle of $150 – bulls (above) or bears (under).

As if the weekly chart wasn’t interesting enough, the daily chart is showing something strange, which reflects the “Battle” at this level:

First, we’re seeing a negative momentum (3/10 Oscillator) divergence as we head into the $150 level.  That’s a non-confirmation.

Beyond that, we’re seeing two long upper shadows – specifically shooting stars – as we tested the $150 level in May and June.  That’s a bearish non-confirmation.

However, we’re also seeing bullish hammers that bounce off the rising 50 day EMA as labeled.

For now, we have a crystal clear rising trendline pattern with key support at $135 and key resistance at $155.

The “IF/THEN” play for this stock appears to be bullish/neutral while inside the channel, bullish breakout above $155, and bearish ‘deeper’ retracement expected (back to $115 or lower perhaps) if under $135/$130.

Technical analysis is very helpful for assessing risk/reward and potential pathways forward, particularly once price comes into a critical “decision” level.

CMG is at such a level.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

8 Comments

8 Responses to “CMG Challenges Weekly Resistance on Daily Divergences”

  1. blue Says:

    Corey, thank you for your blog. I check in everyday and learn something new/reinforce concepts.
    A question I have now is regarding MACD. Sometimes we see the histograms losing momentum while the MACD black/red lines are still headed higher. When this happens, how do you interpret the MACD?

  2. Ajvs Says:

    Corey,

    Don't you think that we had another divergence today? SPY made new highs but NYAD is still declining

    Tks for your nice work

    AJVS

  3. David Says:

    Important observations for those of us trading CMG, but may I pose a question? On the daily chart, after earnings in April, there was a sizable gap up. Wouldn't the 316 almost always form a divergence after such an event? And what to make of the fact that the lows on the 316 are not diverging?

  4. David Says:

    Or rather, I mean 3/10, not 316. My bad.

  5. Corey Rosenbloom, CMT Says:

    David,

    Very good questions.

    Earnings can serve as important impulses which – with gaps – skew oscillators. They serve inherently as momentum 'bursts' or impulses, which means that odds favor a higher price high yet to come after a pullback.

    We saw two such higher highs on divergences – though admittedly, the divergences would be more meaningful without the gap situation.

    During an uptrend, you would not necessarily look at swing lows and oscillator readings for divergences – look for divergences in swing highs during an up move.

    Right now, we look consolidated between the trendlines as the dominant technical short-term structure, so I'd watch for a break of those for the next signal.

  6. Corey Rosenbloom, CMT Says:

    Oh absolutely – I put that chart in tonight's report.

    It's a blatant negative breadth and VOLD divergence with the price structure today. Non-confirmation.

  7. hiker1 Says:

    There looks like a type of evening star pattern in early June.

    Could go higher … But when the Euro, FXE, turns down, I believe disinvestment will come fast. With every passing day, one should think about adding a limited amount, that is a small amount of shorts into this stock.

    The stock, being a consumer discretionary stock, is a testimony to the surrealistic, plastic investment world we live in. Long term wealth can only be garnered and maintained by investing in gold. I am invested in gold coins, that I keep secure far, far, far away from any brokerage account

  8. David Says:

    Thanks, Corey; I appreciate your response.