Key learning points
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Shares of Chipotle fell more than 6% on Thursday, just days before a 50-to-1 stock split in the fast casual restaurant chain’s stock.
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Institutional investors may be booking profits ahead of next Wednesday’s split, as the stock is up more than 40% since the start of the year and has more than doubled since the start of 2023.
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A potential bull trap pattern and bearish divergence indicate weakening momentum in the burrito maker’s stock price.
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Chipotle stock may find support near the key Fibonacci retracement levels of $3,066, $2,821, and $2,622, which also aligns with other key chart areas.
Shares in fast casual restaurant chain Chipotle Mexican Grill (CMG) is likely to remain in focus on Friday after dropping 6.2% on Thursday, the biggest daily percentage loss since last July. The sell-off comes ahead of a 50-1 stock split that takes effect next Wednesday, an event that will make the company’s stock more accessible to a wider range of investors.
Considering the stock is up more than 40% since the beginning of the year and has more than doubled since the start of 2023, institutional investors may see some gains ahead of the split. Below we use technical analysis to identify key levels to pay attention to during a retracement.
Chart signals that weaken uptrend momentum
Since finding support around the 200-day moving average (MA) in October last year, CMG shares have continued to rise sharply, with buyers stepping in to buy pullbacks to the 50-day MA.
Although the price broke out above a period of consolidation to a new all-time high earlier this week, Thursday was a multi-faceted day and the close below the breakout point on the highest trading volume since late March signals a potential bull trap. Such a move ‘traps’ traders or investors who traded on the breakout and generates losses on the resulting long positions.
Additionally, the relative strength index (RSI) made a higher high this week, creating a bearish divergence, a signal indicating weakening momentum.
Keep an eye on these Fibonacci levels during pullbacks
To determine where the stock may find buying support, we can use the Fibonacci retracement tool, which extends from October’s 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.
First, the stock could 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 as it closely matches the pre-breakout gap of March 19, the day prior to the burrito maker’s stock surging 3.5 % after the announcement of the 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 breaks a series of price action in February and March.
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