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Chipotle: Slow Losses, Fast


Possible washout in progress.


I first discussed Chipotle Mexican Grill (CMG) as a short-sale candidate on the Buzz & Banter on June 2nd, soon after I joined the Minyanville community, and then on 8/26. Today it's trading at 54.52 after being mentioned as a short at $91.

CMG's motto,"Slow Food: Fast", certainly turned into "Slow Losses: Fast", and now what's next?

Click to enlarge

A simple glance at the chart reveals a few important things.

  • CMG was trading at $150 in December 2007 and is currently trading at $55.52, having endured a 63% decline in 9 months.

  • The gap-down on Friday was the third successive downside-gap, the first being in April and the second in July.

  • Notice the long red bars in the bottom half of the chart, rising with every gap down, showing that each successive decline has been bringing in more selling.

So, now with more dire fundamental news out on Friday, should CMG remain short?
CMG can certainly try to close this massive gap by running to $70 on Friday and if the volume on the upside is low, there might be one last short sale trade set up right there. The stock might even gravitate toward $50 amidst volatile trading.

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However, I'm worried that the selling has intensified and there might be a washout in progress. I believe that the easy short trade is done and the long-side trade hasn't begun yet, even though the stock might viciously move up in a snapback bounce. And with 35% of float short, the short squeeze might just prove to be the wind beneath CMG's battered wings. So, I would be very careful here and at least cover partial short-positions in this bleak Monday action.

As I said on June 2nd, I still like the company's scrumptious burritos. I still stand by my dire fundamental thesis that I first talked about in June, but in order to be profitable, your trading decisions should never be based on beliefs and desires.

Click to enlarge

And you never want to turn a good trade into an overstay-your-welcome trade!

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No positions in stocks mentioned.

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