If You Own This Stock, Watch Out

11/18/2011 9:00 am EST


After a nearly three-year run, Chipotle Mexican Grill (CMG) is showing signs of weakness on the charts.

Everybody loves a burrito, and for one stock, it has been a place where money has hidden for protection several times during the last few months—a reserve burrito, if you will.

But one by one, these momentum burrito darlings are getting picked off, and I am here to say that Chipotle Mexican Grill (CMG) may be the next one headed for the buzzsaw. Let’s take a look, starting from the broad monthly perspective.

The first clue comes from the monthly chart. It is clearly in an uptrend, but is showing signs of at least a short-term top the last four months.

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This could end up being the end of Wave (III) in the Impulsive Wave higher with Wave (IV) lower, which would be expected to be fairly flat in result given the hard move down in Wave (II).

The Relative Strength Index (RSI) is moving lower off of a technically overbought situation, and the Moving Average Convergence Divergence (MACD) indicator is fading, both supporting consolidation or a move lower.

But coming in closer to the weekly chart gives some further indications. First, notice the slope of the roughly six-month trend lines has been declining each time it is redrawn.

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Also, the Simple Moving Averages (SMA) are progressively flattening. The same movement lower of the RSI, this time in a trend of new lows, since it is now combining with an MACD that is crossing bearishly lower.

But moving in even closer to the daily chart shows that the 340 area has been an area of resistance three times in the last four months.

The stock is making a lower low after a lower high, beginning a downturn on this timeframe, finishing today below both the 50- and 100-day SMAs. The RSI has broken through the midline and is nearing bearish territory, while the MACD is negative and increasing, supporting further downside.

Will it drop 50 or 100 points tomorrow? Not likely, but a move to the 200-day SMA below, a place which it has not been below since March 2009 and which is only $24 lower, will pull in sellers and create a self-fulfilling run lower.

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