Currently, the U.S. equity market is made up of two types of stocks: those being chased higher and displaying vertical moves, for an example, see Goldman Sachs (NYSE: GS); and those that have underperformed the broader market for some time now and/or are nearing important support or resistance levels.
Restaurant stocks Chipotle Mexican Grill (NYSE: CMG) and Panera Bread Company (Nasdaq: PNRA) belong in the latter camp. One is reaching key resistance, the other key support, and while they could be chased higher should the market stampede continue without a breather, I am seeing a high-probability short setup in both stocks with clearly defined risk.
First up, let's take a look at Chipotle stock, which is higher in line with the broader market indices year to date, but last week, reached an important confluence resistance area. This area is marked by resistance from its 200-day simple moving average, the 50% Fibonacci retracement level of the swing lower from the June 2012 highs to the October 2012 lows, negative divergence in momentum oscillators versus price, and to top it off, a bearish shooting star candlestick chart pattern.
When a shooting star candle coincides with other technical resistance points, the stop-loss for traders looking to lean to the short side is at the high of the shooting star candle, in this case $327. An attractive first price target is at $290, and a longer-term price target could be a retest of the October 2012 lows near $234.
Action to Take --> Sell CMG short at $312 or higher. Set stop-loss at $327. Set initial price target at $290 for a potential 7% gain in 3 weeks. Set secondary price target at $234 for a potential 25% gain in 3-5 months.
Turning to Panera stock, it has underperformed the broader market for some time now, and is down about 4% year to date. The stock currently sits atop a confluence support zone made up of its 200-day simple moving average, the 50% Fibonacci retracement of the swing from the June 2012 lows up to the October 2012 highs, as well as lateral support. This support zone is roughly $1 wide, between $155 and $156. The more a support or resistance level gets tested, the weaker it becomes, and if the stock breaks below $155, it will likely lead to a big swing lower.
While near term the stock may be somewhat oversold from a momentum point of view, any break below $155 is shortable despite a potential snapback above $155 before ultimately falling lower again.
A first downside target presents itself near $147, and a longer-term target could be a retest of the June 2012 lows in the mid-$130s. Any move in the stock back above $162 would indicate it is time to cover the short position.
Action to Take --> Sell PNRA short at $155 or lower. Set stop-loss at $162. Set initial price target at $147 for a potential 5% gain in 3 weeks. Set secondary price target at $136 for a potential 12% gain in 3-5 months.
This article originally appeared on ProfitableTrading.com:
2 Restaurant Stocks That Look Ready to Plunge as Much as 25%