Chipotle fits in the category of “Getting Up Off of the Mat” that Dan laid out in yesterday’s MorningWord post. The stock sold off from an all-time high of $622.90 in late March to a low of $475 in late April, and is now back near $600:
In other words, the stock has gone down and then up more than 20% in just the past 3 months. That’s incredible volatility. At the moment, the stock is near the psychologically important $600 level and has been rising relentlessly since the end of May. In fact, the daily RSI reading is very overbought:
When a stock gets this overbought, it’s not necessarily a sign that the stock is going lower anytime soon, but can mean a period of consolidation is in order (see our discussion of AAPL’s chart last week for more on that topic).
We have viewed CMG as divorced from valuation from some time now, but as the stock price action over the past 3 months illustrates, the stock is trading more on technicals than fundamentals in the recent past. With that in mind, we want to keep a close eye on how the stock behaves near $600, and whether momentum slows and forms a divergence.
We’re also interested because options prices are quite low:
Implied volatility will start to rise as we approach CMG’s earnings date in late July. Nonetheless, compared to much of the past 2 years, options premium is on the cheap side, especially when we look at the stock’s huge swings in 2014.
We’ll be looking at possible structures in this one to see if there’s a cheap way to play for a slight pullback or consolidation after a wicked run higher.