Speaking Volumes

Chipotle has been hot - and that is no reference to the sauce - the stock (CMG) has been on fire. Over the last year the stock has increased 62% (from 241 to 390).

But if you are the least bit "technically" inclined, you've probably mastered a simple concept of what it means when volumes expand or contract. Simply, expanding volumes favor the existing trend, and contracting volumes are signs of a reversal. The latter condition is playing out in remarkable fashion.

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As February 2012 ends - here are some volume statistics on Chipotle (CMG):

Since 3/1/2011 (1 year) the daily volume has averaged 829,000 shares
The first half of February 2012, as the stock rose from 367 to 378, daily volume averaged 600,000
The second half of February 2012, the stock rose from 378 to 390, daily volume averaged 400,000; with the last five days of the month all being less than 400,000 shares.

The above graph is the Golden-125 charted for Price and Volume. The Golden-125 employs eight moving averages that have 28 relationships with each other. As the shorter term averages exceed the longer term averages it calculates a progressive point system; longer averages garner more points than shorter averages. The point system results in a score from zero to 125. Zero means every shorter moving average is less than every average of longer duration. Conversely, 125 points means that every shorter moving average exceeds the longer moving averages.

It is clear that in December 2008 that the dropping prices ended when volumes hit zero. Everyone had rushed to the exits, and there were no more sellers to be found. Now the contrasting condition is in effect; the buyers are "in". Volumes are drying up, predicting a price reversal.

The last such sell-off is evidenced on 11/11/2011. Volume hit zero with the CMG price at 332. Two weeks later on 11/25/2011, with volumes spiking, the price dropped 10% to 301.

Watch for heavy volumes starting to occur on down days. Get your bets placed if this makes sense to you; I have established a long put on the January 2013 options with a strike price of 375.