A Painful Sell-Off Sets the Stage for a 41% Rally

It's a dichotomy in the world of investing...

You never want to "catch a falling knife." Buying into a decline is too dangerous... because falling stocks tend to keep falling.

Still, a major crash almost always means opportunity is around the corner. It sets the stage for future returns.

To solve this problem, I wait for the trend to reverse. That shows it's safe to buy. But it helps to know in advance when a downtrend has almost run its course.

Right now, history shows this reversal setup could lead to a major winner...

This popular company recently fell on hard times. Its stock has lost more than a third of its value this year alone. But now, it has fallen too far, too fast. And that's setting up a massive 41% rally ahead...

This Fast-Casual-Dining Stock Is Oversold

If you want to invest after a big decline, you need to first make sure you're looking at quality. You want a strong business with a track record of success.

That's clear with the stock we're looking at today... Chipotle Mexican Grill (CMG).

Chipotle brought the concept of "fast casual" dining to the masses. The stock went public nearly two decades ago. And it has rallied an incredible 21% per year since then.

Chipotle has been a fantastic long-term winner. But it has endured a few rough patches along the way... including this year.

The company released disappointing earnings in July. Growth slowed, and the company lowered guidance for the second half of the year.

This fueled the decline that was already underway. But now, a reversal is likely, based on the relative strength index ("RSI").

The RSI looks at recent price action and tells us if a rally or decline has gone too far, too fast in either direction. Typically, an RSI below 30 signals an "oversold" level – when investors are overly bearish. Chipotle's RSI recently fell below 22.5. Take a look...

Chipotle is down dramatically since hitting an all-time high last June. Normally, you wouldn't want to buy a falling stock. But Chipotle is a quality business. And history suggests the current RSI setup could signal a bottom.

To see it, I looked at each time Chipotle's RSI fell below 22.5. That has only happened 11 other times since the stock went public in 2006... And those were fantastic times to buy. Take a look...

Chipotle has been an incredible long-term winner. The stock has risen 21% a year over nearly two decades. But you can do even better by buying after setups like today's.

Similar instances led to 10.8% gains in three months, 15.1% gains in six months, and 41.1% gains over a year. That's major outperformance. And an annual gain of 41% is darn impressive on its own.

Of course, it's possible that Chipotle's best days could be in the past. But by making that bet, you'd be going against history.

This is likely a rare case of a quality business going on sale. With the RSI telling us it has fallen too far, too fast, investors should pay attention... Once prices turn higher, there will be a window to buy a great business on sale, with limited risk.

So if you're looking for a blue chip to add to your portfolio, Chipotle is worth considering today.

Good investing,

Brett Eversole