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Has Chipotle Become Too Risky to Trade?

I’ve been asking myself “Is Chipotle (CMG) no longer a valid trading candidate because of higher random volatility and overnight gaps?”

 

By Corey Rosenbloom

Let’s answer this question with facts and data – and learn a lesson in how to chart volatility and determine your comfort level.

Here’s the current Daily Chart with Intraday Range plotted:

What we’re measuring here is simple:  it’s the daily price high minus the daily price low.

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If the high was $705.00 per share and the low was $700.00 per share, we would see an intraday range value of $5.00.

We’re seeing the raw data via histogram (red) and the 21 day (one-month) moving average of Intraday Range.

Chipotle (NYSE:CMG) shares saw a similar spike in volatility in January 2015 but we’re seeing increased volatility and new indicator highs in October.

Today’s intraday range is $22.50 per share while the 21 day average intraday range is $15.26.

Only you can determine if this is a benefit or a risk – higher volatility means increased action for day traders at the expense of higher risk of being trapped in a losing position on the wrong side of the movement.

Finally, let’s view the Overnight Gap risk for Chipotle (CMG):

Volatility as you can see above is cyclical : price moves from periods of high volatility to low volatility and vice versa.

We’re in another period of high volatility as evidenced from the overnight gap data.

In October, we saw an overnight gap near $55.00 per share and we’re seeing one of $30.00 per share today.

Similarly, the black line (middle) is the 21 day moving average of the overnight gap data.

September saw the indicator make a new high like that near January.

The current 21 day average overnight gap value is $6.08.

As a swing trader, you certainly do not want to be caught on the wrong side of an adverse overnight gap.

We’re all built differently as traders, but I tend to prefer stocks with more stable, less “gappy” patterns as opposed to those high-flying, high volatility, gappy names.

Depending on your risk tolerance, Chipotle (CMG) has shifted into the category of “Too Risky to Trade.”

With similar stocks, chart Intraday Range and Overnight Gap risk to make similar determinations for stocks you trade.