Buy the Earnings Dip in Chipotle? Here’s the Trade

Chipotle is falling on earnings, despite beating top- and bottom-line expectations. Here's how the charts are setting up now.
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Chipotle Mexican Grill  (CMG) - Get Report was declining Thursday, off about 5% after reporting its third-quarter earnings.

The company posted earnings and revenue that topped expectations. Comp-store sales growth of 8.3% also beat expectations for 7.3% growth.

Further, while restaurant-level margins were pressured down to 19.5%, they came in ahead of estimates looking for 19%. Even better, online sales soared more than 200% year over year and accounted for almost 50% of revenue.

Is it the lack of guidance that is weighing on the stock? Perhaps it is, coupled with the stock’s strong rally ahead of the print. 

However, if that’s the only issue here, then Chipotle’s dip may very well result in a buying opportunity for investors. Let’s look at the charts.

Trading Chipotle

Daily chart of Chipotle stock.

Daily chart of Chipotle stock.

When looking at the chart above, investors will quickly notice the relevance of the 50-day moving average. On the weekly chart (not shown), the 10-day moving average also stands out as key support in the short to intermediate term.

Temporary breaks of the 50-day moving average have not been uncommon over the last few months. This level was breached in early trading, but has since been reclaimed. 

However, from here, bulls will want to see this level continue to act as support.

A break and close below Thursday’s low at $1,253.89 would open the stock up to more downside. Specifically, it could put the $1,185 area in play. Not only is the 100-day moving average near this level, but after previously serving as resistance in July and August, this level was support in September.

Below that could put the $1,075 to $1,100 area on the table, as well as a possible test of the 200-day moving average.

However, the price action feels more like a “reset” than a breakdown. After all, the results were pretty good and Chipotle even received an increased price target after reporting earnings.

If the stock can hold up near current levels, we could have a bullish setup taking place, known as the cup-and-handle formation.

The “cup” took about two months to form, as you can see on the chart with the U-shaped black line. If bulls can limit the size of the dip, the “handle” can form, potentially setting up for a breakout over the $1,375 area.

At the very least in that scenario, I would look for a rally to the two-times range extension near $1,465.