The American chain of fast-casual restaurants in the United States, United Kingdom, Canada, Germany, and France, specializing in tacos and Mission-style burritos, Chipotle Mexican Grill, Inc. (NYSE: CMG) seems to be poised for a decline in its price in the near term as per its latest charts.
Bearish Indications
#1 Rising Wedge Pattern Breakdown: The daily chart shows that CMG has recently broken down from a rising wedge pattern that was formed during the past few months. This is a bearish pattern and is marked in purple color in the daily chart. Once a stock breaks down from the bottom of the rising wedge pattern, it typically moves lower in the near-term. Currently, the stock has broken down from the rising wedge pattern, which is a possible bearish sign.
Daily Chart – CMG
#2 %K below %D in Stochastic: The %K line is currently below the %D line in stochastic of the daily chart. It is also moving down from overbought levels. All these indicate possible bearishness.
[hana-code-insert name=’adsense-article’ /]#3 Bearish ADX and DI: The ADX and DI indicate bearishness.
This is because (+DI) < (-DI); ADX and (-DI) are above (+DI); and ADX has started rising from below both (+DI) and (-DI).
All these points to possible bearishness.
#4 MACD below signal line: The MACD line (blue color) is currently below the MACD signal line (orange color), indicating bearishness.
#5 Price below MA: The price is currently below the short-term moving average of 50-day SMA. This usually implies a possible bearish bias for the stock.
#5 Supply area: The weekly chart shows that the stock is currently near a supply area, which is marked as a pink rectangle. The stock was not able to cross above this level even after multiple weeks. This indicates possible bearishness.
Weekly Chart – CMG
#6 Bearish Divergence between RSI and Price: The weekly chart shows that there is a bearish divergence between RSI and price. This is because while the price was making higher highs, RSI was forming lower highs. This usually indicates the possibility of an upcoming bearish move. This bearish divergence is marked as blue dotted lines.
#7 Bearish Stochastic: The stochastic in the weekly chart is near overbought levels and moving down. The %K line has also crossed below the %D line. All these indicate possible bearishness.
Recommended Trade (based on the charts)
Sell Levels: If you want to get in on this trade, you can take short positions on CMG below the price of around $776.
TP: Our target prices are $755 and $740 in the next 3-6 months.
SL: To limit risk, place a stop loss at $790. Note that this stop loss is on a closing basis.
Our target potential downside is 3% to 5% in the next 3-6 months.
For a risk of $14.00, our target rewards are $21.00 and $36.00. This is a nearly 1:2 and 1:3 risk-reward trade.
In other words, this trade offers nearly 2x to 3x rewards compared to the risks.
Risks to Consider
The stock may reverse its overall trend if it breaks upwards from the rising wedge pattern with high volume. The breakout of the stock could also be triggered in case of any positive news, overall strength in the market, or any regulatory changes in its sector.
Happy Trading!
Tara
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