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Beware the Chipotle 'burrito pattern': Technician

According to Goldman Sachs, the time is ripe to bet on Chipotle.

The Mexican fast-food giant is scheduled to report its third-quarter earnings on Oct. 20, and the bank is recommending a bullish options trade ahead of the release.

However, one technician sees a pattern in the charts that makes him nervous about this trade — very fittingly, in the form of one Chipotle staple.

"I think the Chipotle chart sets up in a consolidation, it looks like it's wrapped up in a big-old, tight burrito," Todd Gordon of TradingAnalysis.com said Wednesday on CNBC's "Trading Nation."

In the past month, Chipotle shares have traded in a range between $700 and $740. And although the options market is implying a big move after the earnings release, Gordon said betting on one specific direction for the move could be very risky.


"Goldman makes note in this call that there's high implied volatility prior to earnings. When you combine that with this burrito pattern we have in the chart, that makes me a little cautious," Gordon said. "You have to be directionally spot-on in order to make money in this trade."

Specifically, Goldman recommends buying the October 23rd 715-strike call for $28.90, a bet that Chipotle's stock will be above $744 by expiration. This would be a 3 percent rise from Wednesday's close at $720.

Goldman restaurant analyst Karen Holthouse sees 12 percent upside in the stock over the next 12 months, namely because of millennial appeal, a move to mobile ordering and lower food inflation.

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However, Erin Gibbs of S&P Capital IQ also said Goldman's trade could be a risky one.

She said that although Chipotle is expected to outperform its competitors in the fast-food industry this year, the stock is still too highly valued to be a long-term buy.

"I would only recommend Chipotle as a very short-term, earnings-surprise, risky investment and not as a longer-term core holding," Gibbs said.

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Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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