How You Could Have Doubled Your Chipotle's ROI

Continuation From Friday……(How You Could Have Squeezed An Additional 1,100% ROI From Apple Inc)

As per our earlier analysis, we would have initiated our original long position in Chipotle’s stock in November of 2008 at $42.20. A bear market of 2007-2009 was coming to an end and any potential investor in the stock should have been watching for a trend reversal and a possible entry point. A down trending resistance line was broken to the upside in November of 2008 and a long position should have been initiated at that time.

CMG Trade #1: Buy CMG at $42.20 in November of 2008.

From its 2008 bottom, Chipotle’s stock pushed higher unabated until reaching its interim top of $440 in April of 2012. Thereafter, the stock price proceeded to collapse 45% in 6 months. As with our Apple analysis above, there was no way to anticipate this particular collapse. Outside of a few fundamental and technical warning signs, there was nothing to suggest that Chipotle’s stock was about to go through a substantial decline. Nevertheless, any investor in the stock at the time should have been concerned with technical development between April and June of 2012.

The actual breakdown in Chipotle’s stock had occurred in early July of 2012 at around $380 a share. A trader should have liquidated his long position at the time and gone short.

CMG Trade #2: Sell CMG at $380 and go short at the same time/price. Net realized gain from the previous entry point…..$338 or 800%.

The stock price proceeded to quickly collapse to $242 by October of 2012. Throughout this collapse an analyst following the stock should have been watching for signs of a bottom. Since the overall bull market of 2009-2014 was still intact, it was prudent to assume that the stock would bounce as soon as the bottom was reached. And that is exactly what happened in December of 2012 when the technical picture reversed and the stock price pushed above higher high at $270 a share. A short position should have been covered at the time and a long position should have been re-entered.

CMG Trade #2: Cover our CMG short position at $270 in December of 2012 and go long at the same time. Net realized gain from the previous entry point…..$110 or 29%. Overall gain $448 or 1,061%.

Subsequently, Chipotle’s stock price quickly recovered to around $675, where it remains today. Yielding a total gain of $853 or 2,021% vs. our original gain of 1,465%. Proving, once again, the validity of the strategy.

Yet, just as with the Apple Inc example above, investors in Chipotle’s stock today (8/20/2014) should be on a heightened state of alert. Based on the stock’s extreme overvaluation levels and the upcoming bear market of 2014-2017. In essence, investors in Chipotle’s stock should be watching the stock very carefully for any signs of a technical breakdown. Ready to reverse position and go short at a moment’s notice. Buying the stock back later on and at a bear market bottom.

To Be Continued Tomorrow……