Chipotle Mexican Grill (CMG) was a wall superstar stock rising more than 1900% since its 2008 financial crisis bottom. The stock peaked in August of last year stopping shy of $760/share. That same month, both a salmonella and norovirus outbreak occurred. In October and November E-coli contamination was reported as was another norovirus outbreak.  Needless to say, this has turned both customers and investors away in droves. The stock fell almost 48% from peak to trough, bottoming in January at $400. Since then it rallied 35% up to $540/share, topping in March. Was the bottom put in and this stock is presenting us a great investment opportunity? Lets take a look at the chart and see what it is telling us.

In the top pane we can see that RSI momentum has fallen from the bullish to bearish zone, is languishing below its midline and just reversed course, now pointing down.  Since peaking, price has formed a very nice bear flag pattern which just this week broke to the downside projecting to further lower prices ahead.  Price remains below a downward pointing 200 day moving average. Notice how the Jan-Mar rally was done on lower volume (bottom pane) which warns of it being just a counter-trend rally rather than a reversal. All the signs on the longer term chart are pointing to more downside, one target being the 2012, $240 lows. Ouch! 

When a longer term chart is providing a compelling story I look to the shorter term charts confirm and then pinpoint my entry.  In the daily chart below you can see that flag pattern has now morphed into a head and shoulders pattern. Of course, some of you will be thinking head and shoulders are reversal patterns that mark the end of uptrends and this stock is clearly not in an uptrend. You would be correct but head and shoulders are found not just in uptrends and while not quite as compelling in the middle of a move, are important confirmations to the longer time frames.

Friday’s price closed below the neckline, providing perhaps an excellent entry signal for those whose risk tolerance includes shorting stocks. The risk reward ratio for this opportunity is well beyond the 1:3 target I favor.

To make me feel better about this trade I want to see volume pick up as it breaks January’s $400 low otherwise I will remain concerned this is a potential false breakdown. A spike in volume could start a waterfall event putting a stake in the hearts of those remaining bulls. A word of caution … as with any news driven event, a similar news event could cause it to reverse course just as swiftly as it turned down. As such it is imperative investors have a game plan to protect them from this possibility.