In August 2015 the price of Chipotle Mexican Grill (NYSE:CMG) stock was hovering in the vicinity of $760 a share. The company was a Wall Street darling, whose future looked especially bright considering its revenue and earnings growth over the past several years. Unfortunately for all CMG shareholders, E.coli, salmonella and norovirus outbreaks formed a perfect storm which scared Chipotle’s customers away and led to a 13.3% sales decline in 2016. As a result, the burrito chain’s profits crashed and the stock price followed. By February 2018, CMG stock was trading below $248 per share, down 67% from its all-time high.
The last six months, however, paint a very different picture. As of Friday’s close, Chipotle stock is up over 90% from the February low and is currently trading above $472 a share. It is easy to fall in love with a stock after such a strong and fast rally, but should investors join the bulls right away or wait for a pullback? That is the question the chart below aims to answer.
The 4-hour chart of Chipotle shows the stocks entire recovery from $247.52. As visible, it looks like a five-wave impulse, whose fifth wave is probably still under construction. The pattern has been developing within the parallel lines of a trend channel, drawn through the highs of waves 1 and 3 and the lows of waves 2 and 4. The sub-waves of wave 3 are easy to recognize, as well.
According to the Elliott Wave Principle, impulses point in the direction of the larger trend, but are followed by a three-wave correction before it resumes. This means that once wave 5 completes the pattern somewhere near the $500 mark, a notable decline should be expected. The RSI indicator supports the short-term negative outlook with a bearish divergence between waves 3 and 5.
Chipotle’s business still hasn’t fully recovered from the 2015-2016 debacle and we think the stock market is getting ahead of itself now. This analysis suggests a healthy pullback down to the $400 mark is highly likely, before the uptrend can resume.
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