"Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing. Therefore, just as water retains no constant shape, so in warfare there are no constant conditions."
Sun Tzu

Thursday, June 28, 2012

Is CMG a Short?

I lost some money yesterday with a long position in CMG. I bought on Tuesday because of the tight consolidation after some encouraging price/volume action of the last weeks. Even though I lost money, it was a good trade because I followed my rules.

After yesterday's action, CMG looks rather like a short than a long. Momentum stocks can decline very rapidly if they fall out of favor and Chipotle might be in such a position. Should weakness continue and the stock moves below $390 in the coming days, I have no problem shorting the stock. $300 offers an attractive price target based on long-term Fibonacci levels, which would be a 30% decline from current levels. CMG is expensive, trading at a generous 53 times trailing earnings and is heavily shorted with 15% of float, so there are others who think the rally could be over.

For comparison, here is the chart of another former momentum leader: GMCR. Not how the Fibonacci levels played out nicely and how relative strength was the key measure to give the sell signal: