Instead of reacting positively to these solid results, shares of Chipotle Mexican Grill sank by 9.8% from the day's close of $673.07 to a low of $607.01.
Here is Jim Cramer's take.
What caused this unexpected reaction is that same-store sales increased below analysts' estimates. But during the company's post-earnings conference call, management reported that both sales and transactions recovered this month.
As a result of the after-hours reversal, shares of Chipotle Mexican Grill gapped higher at the open on Wednesday. This is the only reaction to earnings that shows up on the must-see daily and weekly chart since the negative reaction didn't occur during normal trading hours.
Let's illustrate how investors can better prepare for earnings volatility using must-see daily and weekly and key trading levels.
Here is the daily chart for Chipotle Mexican Grill:
Courtesy of MetaStock Xenith
Chipotle Mexican Grill closed at $673.07 on Tuesday before the company released quarterly earnings. The horizon line in blue represents the initial negative reaction low of $607.01.
Investors who use technical charts could have drawn this line by connecting the high of $607.36 set on July 14, 2014, through the low of $607 55 set on Oct. 21. This is how "filling a price gap" can be used to find a level at which to buy on weakness following a negative reaction to earnings.
This is also why investors should place a good 'til canceled limit order to purchase a stock on weakness to that key level. This strategy could have been used by investors who want to add to positions on weakness for shares of Chipotle Mexican Grill.
From the close of $673.07 on Tuesday to the post-earnings low of $607.01, the stock declined 9.8% as mentioned above. This part of the price action isn't shown on the chart.
What is shown is the price gap at the open of $695 on Wednesday. From that open the stock rose 9.1% to the all-time high of $734.50 set on Thursday.
The total range from the low of $607.01 to the high of $734.50 was a gain of 21%.
Here is the weekly chart for Chipotle Mexican Grill:
Courtesy of MetaStock Xenith
The weekly chart for Chipotle Mexican Grill has been positive since the weekly close of $661.95 on July 17, which was also a positive technical set-up for earnings. The stock is well above its key weekly moving average of $650.66 with its weekly momentum is projected to rise to 43.71 this week, up from a reading of 26.95 on July 17.
Investors looking to buy Chipotle Mexican Grill should place a good 'til canceled limit order to buy the stock if it drops to $620.08, which is a key level on technical charts until the end of the year. This level came into play in a price decline note seen on the charts.
Investors looking to reduce holdings should place a good 'til canceled limit to sell the stock if it rises to $820.93, which is a key level on technical charts until the end of September.
Investors not familiar with technical analysis should begin with the notion that a price chart for a stock shows a road map of past price performance, which provides guidance for predicting future share price direction.
Here is how to read a daily chart: There are two moving averages to follow; the 50-day simple moving average is in blue, while the 200-day SMA is in green.
Here is how to read a weekly chart: The red line tracks the ups and downs of the key weekly moving average. The green line is the 200-week SMA.
The red line that oscillates along the bottom of the chart is the momentum reading on a scale of 0 to 100. A reading below 20 is oversold, and a reading above 80 is overbought.
A technically positive weekly chart occurs when a stock ends a week above its key weekly moving average with the momentum reading rising above 20.
A technically negative weekly chart occurs when a stock ends a week below its key weekly moving average with the momentum reading declining below 80.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.