I wrote a blog piece on October 13th about Chipotle Mexican Grill Restaurants (CMG) (click here). I wrote it back then because the daily ATR resistance level had been broken and therefore I was wondering whether or not the stock was complete in terms of its downward pain. I stated that despite the improvement in the look of the daily/195-min charts, I was going to hold off looking at taking any positional/swing trades in CMG until at least after CMG was able to take-out the relative strength indicator’s prior pivot high on the 195-min chart. It never got that far, before the earnings report took out the legs from underneath the stock price today.
My title reference of “the Mexican Two-Step” back on Oct 13th refers to the common occurrence that Canadians experience when down in Mexico during the winter months … bugs/viruses in the water/food/drinks often show up in the need to spend significant time on the toilet. Well, it looks like the holders of CMG going into the earnings report didn’t quite make it back to the toilet in time to avoid an accident!
I thought it would be useful to put up the longer-term charts, to show traders once again why I think you need to have the longer-term frame charts in sync with your intended trade if you expect to swing trade any stock nowadays. Ignoring the bigger time can cause serious pain at times …
CMG – Monthly Chart
Again, be aware of the trend on the bigger time frames … the monthly chart broke below its ATR support level in December 2015 and hasn’t sniffed the ATR resistance line since. Until that monthly ATR level is broken, the stock is still in its downtrend.
CMG – Weekly Chart
The weekly chart broke above its ATR resistance back in late March – was that when Bill Ackman was accumulating stock??? Anyways, CMG is a good lesson of why you should always wait for acceptance of an ATR break before you believe that a new trend has begun. Because the monthly chart was still in a downtrend, traders should have been wary of a bounce off of a new low on the weekly chart … before a low on the weekly chart could be considered safe to swing trade against, you needed to get an “acceptance” of that ATR break. That didn’t happen here with CMG so swing trading CMG was not something I would suggest traders do yet. The break of the weekly ATR did open up the stock to possibly making a multi-week bounce that traders could trade using the daily or 195-min chart with. By that, I am referring to a positional trade where traders would hold CMG for 3-5 days maximum.
CMG – Daily Chart #1
You can see where the weekly time frame bounce happened on the above daily chart … if you gear down far enough, you could have picked several lower risk entry areas and utilized the daily time frame ATR support level as your stop.
Once price broke below the daily ATR support level on June 7th, you should have been long gone out of your long trades in CMG.
Here is the more recent daily chart for CMG …
CMG – Daily Chart #2
CMG – 195 Minute Chart
You can see that the R/S indicator did not take out the prior pivot high on a closing candle basis … I like to see price and R/S confirming each other when looking at longer holding period type trades.
Cheers … Leaf_West