Stock Of The Day: Will Chipotle Mexican Grill Break Out?

Shares of Chipotle Mexican Grill, Inc. CMG are strong Monday. Morgan Stanley MS upgraded the stock to overweight from equal weight. It also raised the price target from $65 to $70.

Chipotle is testing resistance around the $55 level. If it breaks this resistance the rally may continue. This is why it is our Stock of the Day.

You can see on the chart below, this level was support in October. It was also support in January and February. Price levels that had previously been support can convert into resistance and that's what happened here.

It occurred around the $58.50 level as well. In November, it provided support. Then in January and February, it converted into a resistance level.

This dynamic is due to investment psychology.

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Some people who buy shares at a support level think they made a good move if the price rallies after. But if the support breaks and the price moves lower, a number of them come to think they made a mistake and decide to sell.

But they don't want to lose any money.

So, they hold on to their losing position but vow to get out at breakeven if they can. As a result, if the shares rally back up to the buy price they place sell orders. If there is a large amount of these orders, it can create resistance around the same price that had been support.

If the shares trade and hold above resistance, traders say it is a ‘breakout'.

This isn't just symbolic. It illustrates an important market dynamic. It shows that the traders and investors who created the resistance with their sell orders are out of the way. They have either finished or canceled their orders.

With this large amount of supply taken off the market, the stage is set for a move higher.

If buyers enter the market, they may have a hard time finding someone to sell them shares. They may be forced to pay premiums to draw sellers back in.

This could force the shares higher and it may be about to happen with Chipotle.

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