Chipotle Mexican Grill Inc. (NYSE:CMG) is sliding again on Monday. This comes after last week's meltdown. The stock dropped by more than 13% Thursday after reporting earnings.
See real-time price here for CMG.
It is the Stock of the Day because it is oversold and at a support level. These conditions may set the stage for a reversal and move higher.
Many trading strategies are built around the concept of reversion to the mean. If a stock gets overextended in one direction or the other, there is a good chance that it reverses.
If sellers are emotional and aggressive and push the shares below their normal or typical trading range, traders say they are oversold. This will draw buyers into the market, who will be anticipating a reversion or move higher, and their buying could force the price up.
There are many ways to determine if a stock is oversold. Some popular and simple indicators include Stochastics, Moving Average Convergence Divergence (MACD) and the Relative Strength Index (RSI).
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Another way is to use a Demark Indicator; one is displayed on the chart.
If there are nine closes in a row where it was higher than the closing price four sessions prior, it is a sell signal. As you can see, the last two of these signals were great times to sell.
Conversely, if there are nine trading sessions where the close was lower than the closing four sessions before, it is considered to be a buy signal. The one in late May was a good time to buy.
A “9” appeared on the chart on Thursday. Of course, it is too soon to tell, but there is a chance that now will be another good time to buy.
Chipotle is also close to a level that has been support before. A lot of times if a stock drops to a level that had been support previously, a reversal and rally follow.
This combination of being oversold while at support could mean it is time to buy this stock.
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