How to Trade Chipotle Earnings

If Chipotle delivers 'less bad' earnings on Thursday, its stock could move higher by 10%.
By Richard Saintvilus ,

With its shares down some 45% from its 52-week high, Chipotle Mexican Grill (CMG) - Get Report is still struggling to establish a meaningful recovery. The embattled burrito chain is set to report second-quarter earnings results after the closing bell Thursday.

Wall Street is still mixed about Chipotle's next direction as it attempts to recover from multiple food-borne illness scandals. But Chipotle shares are tempting.

Assuming Chipotle can find its "all-day breakfast"-type breakthrough, which worked wonders for McDonald's (MCD) - Get Report , Chipotle stock could reach $450 to $475 by the end of the year.

Take a look at the red arrow on the chart, which is courtesy of TradingView.

Chipotle shares closed Tuesday at $415.31, up 1.6%. The stock is down 13.5% year to date, including a 4.5% rise over the past month. This compares to a 5.9% rise in the S&P 500 (SPX) . The stock's slight bounce put Chipotle shares back above the 20-day moving average at $402.21 (blue line).

From the chart above, you can see how Chipotle shares have established firm support at around $388 (green line), bouncing off of that level multiple times since the middle of June. This serves as a near-term bottom, while creating solid support around 6.5% below current levels. This means if earnings disappoint on Thursday, the downside risk is limited.

On the flip side, assuming a "less bad" report is delivered Thursday, Chipotle stock could move higher by 10%.

Despite the stream of bad news and the likelihood that Chipotle could recover, the stock still has considerable short interest. As of the most recent settlement date, some 4.47 million shares were sold short, accounting for almost 18% of the float. This compares to 1.7% in short sale float for McDonald's.

If the weak hands are now out of the stock and the massive selling is over, the shares could continue to move higher, reclaiming the 50-day ($421.59 -- pink line) and 100-day ($445.56 -- yellow line) benchmarks. If that happens, the next upward move could put the stock in a range of $450 to $475 -- areas where the stock traded between March and May of this year.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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