Here's Why Chipotle Is a Buy on Weakness

Chipotle has rebounded nicely off last week's low and is now beginning to pierce a major overhead trend line.
By Gary Morrow ,

Shares of Chipotle Mexican Grill (CMG) - Get Report are attempting to clear an important hurdle today. The stock has rebounded nicely off last week's low and is now beginning to pierce a major overhead trend line.

For Chipotle bulls, a clear break above the $420 area should give them a big boost in confidence.

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Chipotle's impressive recovery off the January lows stalled in early March after a 35% gain. This rally retraced one third of the massive breakdown from the October 2015 peak. Chipotle began a fresh leg lower less than a week after topping out near $542. Over the next four months, the stock put in a string of lower monthly highs as it drifted down to major support near the January low. By mid-June, just after falling below $400, Chipotle began to look completely sold out. With a divergent moving average convergence/divergence bottom forming, while the stock gave away little extra ground , a bottom began to form.

Heading into this week, Chipotle has been trading in a narrow range near the January low. This constructive pattern appears to be providing the footing needed for a fresh bull leg.

Chipotle is not out of the woods yet, but it is beginning to chew through heavy resistance near the April of $415. Just above this level is an overhead trend line that links the March and May highs. Chipotle is trading above both levels at midday as it begins to put some distance on $400. If the stock can continue to build momentum from today's breakout type move a new bull leg could be on the way.

In the near term, Chipotle investors should consider the stock a buy on weakness. The $415-to-$405 area is now a low-risk buy area. A close back below this week's low of $401 would be a clear warning sign that a more prolonged base will be needed before Chipotle is ready to rally.

Of note, Chipotle is slated to release its second-quarter results on July 21 after the close.

Disclosure: This article is commentary by an independent contributor. At the time of publication, the author was long CMG.

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