The last time we wrote about Chipotle Mexican Grill, the stock was hovering around $470, following a rally from $248 in six months. The company was recovering from its 2016 E.coli, salmonella and norovirus outbreaks and Wall Street was once again embracing Chipotle stock.
However, instead of joining the bulls right away, we decided to take a look at CMG through the prism of the Elliott Wave principle. The chart below, published on July 30th 2018, suggested a “healthy pullback” can be expected.
The 4-hour price chart of Chipotle stock revealed that the surge from $248 to $472 was shaping up as a five-wave impulse pattern. According to the theory, a three-wave correction in the opposite direction follows every impulse.
Waves 1 through 4 were already there, which meant that “once wave 5 completes the pattern somewhere near the $500 mark, a notable decline should be expected.” Besides, the bearish MACD divergence between waves 3 and 5 gave us another reason for caution.
According to the analysis, a much better buying opportunity was likely to occur near $400. The updated chart below shows how Chipotle stock has been developing during the last eight months.
The bulls managed to lift the price to $531 on August 16th, only to pass the baton back to the bears. By December 24th, CMG was down to $383 a share. Fortunately for Chipotle shareholders, the Elliott Wave principle states that once a 5-3 wave cycle is formed, the larger trend resumes in the direction of the impulsive sequence.
What Lies Ahead for Chipotle Stock?
As of this writing, the price is gravitating around the $700 mark. Given the speed and sharpness of the recovery from $383, we think it is safe to label it as wave (3). This allows us to assume CMG is on its way to $840 in the not so distant future. Reaching this level would mean wave (3) is 1.618 times longer than wave (1), which is a typical Fibonacci extension ratio for third waves.
Once there, long positions would be in real danger, because if this analysis is correct, wave (4) can drag Chipotle stock back down to the 38.2% Fibonacci level near $700 before the uptrend can resume in wave (5) towards ~$900.
Of course, technical analysis is not an exact science. The lines drawn and price levels mentioned in this analysis are only approximations. However, given how accurately Chipotle stock has been following the Elliott Wave rules so far, it pays to keep the above-shown road map in mind.
Did you like this analysis? Similar Elliott Wave setups occur in the Forex, crypto and commodities markets, as well. Our Elliott Wave Video Course can teach you how to uncover them yourself!