How to Trade Chipotle Stock Into Earnings
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Chipotle Mexican Grill (CMG) - Get Report and Starbucks (SBUX) - Get Report have defied investors' expectations over the past year. The stocks have been ramping higher and pushing through overbought conditions like many wouldn't have thought possible.
Starbucks hardly blinked through the fourth-quarter meltdown -- actually rising for the quarter -- and is up more than 76% over the past year. Chipotle has been on a tear of its own as well, surging almost 70% so far in 2019.
With earnings set for Tuesday after the close, investors are fretting about how to trade this one. Should they buy and go with the momentum? Sell ahead of the print because shares are up so much on the year?
Selling a stock simply because it's been strong has not been very wise, particularly over the past decade. But buying blind after such a move can have its own punishing effects.
Although Chipotle stock has put together an immense rally so far this year, many investors would be surprised to know that it's actually spent much of the past few months consolidating. Shares are up just 4% over the last 90 days, as CMG stock chops sideways.
That pales in comparison to Starbucks stock, which is up almost 20% over the last three months. If you were to only take profits in one ahead of the quarter -- Starbucks reports later this week -- it may as well be SBUX instead of CMG.
Trading Chipotle Stock
I like that Chipotle stock has spent the past few sessions in a decline. The stock has fallen almost 4.5% from its highs last week, as $765 is clearly acting as resistance. On the plus side, the $720 level should act as support should Chipotle fall that far ahead of its earnings results.
The stock is breaking below its 20-day moving average on Tuesday. In a non-earnings event, this would have me waiting for a test of the 50-day moving average. Making this entry even more enticing is the fact that it coincides with $720 support, which was prior resistance in April and May.
So what now?
The options market is pricing in an approximate move of $47 by the close on Friday. That's a move of roughly 6.4% from current levels, although this is subject to change before Tuesday's close. A $47 rally would put CMG stock at $780, while a $47 decline would drop Chipotle stock down to $686. It's worth mentioning that these implied options moves are just a piece to the puzzle, not a guaranteed predictor of the coming move.
On the chart, I would love to see $720 hold as support. If it fails to, I want to see $680 hold, as this level has proven significant over the past few months. Below it could usher in the June lows.
If Chipotle stock rallies, I want to see it push through $765 resistance. If it does, it will be important to see if some of its prior trend lines (blue lines) stymie a rally near $770 to $775, or if CMG stock can breakout over these marks and put a run to $800 on the list of possibilities.
This article is commentary by an independent contributor. At the time of publication, the author had no positions in the stocks mentioned.