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Key Takeaways
- Chipotle shares dropped more than 6% on Thursday, just days before a 50-for-1 stock split in the fast casual restaurant chain’s shares.
- Institutional investors may be booking profits ahead of next Wednesday’s split, given the stock has gained more than 40% since the start of the year and has more than doubled since the start of 2023.
- A potential bull trap pattern and bearish divergence indicates weakening momentum in the burrito maker’s share price.
- Chipotle shares may find support near key Fibonacci retracement levels at $3,066, $2,821, and $2,622, which also align with other key chart areas.
Shares in fast casual restaurant chain Chipotle Mexican Grill ( CMG ) will likely remain in focus Friday following a 6.2% decline on Thursday, their largest daily percentage loss since last July. The sell-off comes ahead of a 50-for-1 stock split that takes effect next Wednesday, an event that will make the company’s shares more accessible to a wider range of investors.
Given that the stock has gained more than 40% since the start of the year and has more than doubled since the start of 2023, institutional investors may be booking some profits ahead of the split. Below, we use technical analysis to identify important levels to watch out for during a retracement.
Chart Signals Weakening Uptrend Momentum
Since finding support around the 200-day moving average (MA) in October last year, CMG shares have continued to trend sharply higher, with buyers stepping in to buy pullbacks to the 50-day MA.
Although the price broke above a period of consolidation to a new record high earlier this week, Thursday was a wide-ranging day and the close below the breakout point on the highest trading volume since late March indicates a potential bull trap . Such a move “traps” traders or investors who acted on the breakout and generates losses on resulting long positions.
Moreover, as the stock made a higher high this week, the relative strength index (RSI) made a lower high, creating a bearish divergence , a signal that suggests weakening momentum.
Monitor These Fibonacci Levels During Pullbacks
To determine where the stock may find buying support, we can use the Fibonacci retracement tool stretched from the October low to this week’s all-time high (ATH) . However, as with all technical indicators, investors should confirm signals with other chart analysis to identify high probability areas.
Firstly, the shares may find buying interest at the 23.6% Fibonacci retracement level at $3,066, a region that also aligns with last month’s swing low . The 38.2% Fib level at $2,821 could mark another key support area, given it closely aligns with the March 19 pre-breakout gap , the day prior to the burrito maker’s shares jumping 3.5% after announcing its stock split.
Finally, It’s also worth keeping an eye on the key 50% Fib retracement level at $2,622, an area on the chart that cuts through a series of price action in February and March.
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As of the date this article was written, the author does not own any of the above securities.