Craving Some Tex Mex

July 22, 2014 11:57 AM

Monday night Chipotle Mexican Grill, $CMG, the grandaddy of the burrito, reported earnings and hit a grand slam.  It is tough to buy this stock at over $660 a share in any sizeable quantities.  And frankly, from a technical perspective the gap higher took it into overbought territory and out of the Bollinger bands, a volatility measure.  But if you have a hankering for Tex Mex there is another company that has a totally different stock price set up.   Chuy’s, $CHUY, owns and operates Tex Mex restaurants in Texas and the southeastern and midwest states.  I have never seen one but I can tell from the chart below that the market has clearly preferred other companies over the last 4 months.  But it also says that view may be turning.

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There are 3 signs in the chart that make it interesting for at least a short term trade. First, the price bottomed 3 days ago and has followed through higher over the last 2 days. The volume on the sell off from early July was relatively high and has now subsided, indicating that sellers may have exhausted their holdings. Finally the RSI, a momentum indicator, is reversing higher from a deeply over sold level.

None of this guarantees a reversal in price higher but it does set up a good reward to risk mean reversion trade. Using the low at about 26 as a stop loss point, so risking about $1.25, a buyer can look for a reversion to the 32 to 36 area where all of the moving averages have been. Good for between a 3.8-7.0 reward to risk ratio. That ought to quench your appetite. I picked up some today at 27.25.

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