A health scare for Chipotle Mexican Grill, Inc. (NYSE: CMG ) has just sent shares back into the freshly scrubbed hands of the bears. But is the latest unwanted news an opportunity for bullish investors with cast-iron stomachs? I think so, and I have a trade on CMG stock that will capitalize on the newest fears.
Chipotle investors have not been a happy group of bulls in recent weeks. Prior to Tuesday's trading session, an already sickly looking CMG was off roughly 21% from its mid-May high of around $496. But is the latest health incident really the nail in the coffin?
I personally don't see that being the case.
What we do know is that CMG stock tanked more than 4% during Tuesday's regular hours. The reaction was in response to one of Chipotle's stores in Sterling, Virginia, temporarily closing its doors following numerous consumer reports on the website "I Was Poisoned" complaining that they fell ill with norovirus-like symptoms after having eaten at the Sterling location.
While the situation appears to have caused illness, it's fair to point out that Chipotle has made a number of improvements to its food safety practices and operated in a more transparent manner since the 2015 flare-up.
Tuesday's news is bad, of course, as CMG stock finally was starting to earn a little (emphasis on a little) trust back again. I get that. But at the end of the day, this seems more along the lines of an unfortunate coincidence - food sickness does happen from time to time, even across chains with stronger reputations - rather than another gross misstep in protocol that's in obvious need of change.
Given the historical record on how these sorts of things play out, it might take a while longer before Wall Street is ready to give Chipotle another chance. But I'm of the opinion that CMG stock will bounce back.
Click to Enlarge Technically speaking, and prior to Tuesday's price swoon, Chipotle shares were already starting to scrawl out a scare of their own.
Specifically, over the past month, shares had failed to comply with Fibonacci support in breaking below the 50% and 62% retracement levels.
When we last discussed Chipotle stock, our focus had been on the 50% level holding due to a confluence of two key trend-lines offering additional and key support. However, typically the last line of defense is the 62% level for bulls looking to draw a line in the sand.
Tuesday's bearish reaction combined with the recent technical failures puts CMG in a testing position of November's corrective low near $353. It also sets up a double-bottom pattern.
A Bullish Strategy on CMG Stock
Last time we discussed Chipotle, I outlined the use of a modified fence to develop a bullish startegy to honor zone support. The September-dated strategy limited risk to $5.40, or a fairly insignificant 1.20% of stock risk in relation to CMG's price of $451.
With CMG stock off $76, or nearly 17% since then, clearly we suffered losses. However, the well-contained risk offered by the modified fence has come in handy, and I suggest using the same strategy to approach Chipotle going forward.
There's another benefit to using this type strategy as well. While it may not be for everyone, traders put themselves in a much strong position - financially and mentally - to buy back into the stock for a second attempt during extreme price action.
Investment accounts under Christopher Tyler's management currently own positions in CMG and/or its derivatives. The information offered is based upon Christopher Tyler's observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits .
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