CarMax KMX is the largest used-car retailer in the United States and the stock has been on in a strong momentum run up. This stalled on disappointing earnings reported on Dec. 20.
The Richmond, Virginia-based missed earnings-per-share estimates ending a six-quarter winning streak.
The stock opened with a price gap below its 50-day simple moving average at $96 which indicates risk to its 200-day simple moving average at $84.20 which is the buy level with the stock above a golden cross on its daily chart.
CarMax also gapped below its five-week modified moving average at $94.97. The weekly chart faces a downgrade to negative as its 12x3x3 weekly slow stochastic reading is poised to decline below 80 which kicks the stock below overbought territory.
CarMax closed Thursday at $98.79 up 57.5% year to date and in bull market territory 70.5% above its 2019 low of $57.95 set on Jan. 23. The stock set its all-time intraday high of $100.49 on Nov. 11.
The Daily Chart for CarMax
Courtesy of Refinitiv XENITH
The daily chart for CarMax shows the that the stock has been above a “golden cross” since May 7 when the 50-day simple moving average moved above the 200-day simple moving average to indicate that higher prices would follow. This tracked the stock to its all-time high of $100.49 set on Nov. 19.
The stock closed at $62.73 on Dec. 31 which was an important input to my proprietary analytics. The annual pivot at $76.91 was a magnet between April 17 and May 29 and is now an annual value level.
The stock closed at $86.83 on June 28 was another important input to my analytics. The second half semiannual value level lags at $67.98.
The stock closed at $88.00 on Sep. 30 which was an input that resulted in its fourth quarter value level at $72.85.
The close of $97.26 on Nov. 29 was an input that resulted in a monthly risky level for December at $105.69 which is above the chart.
The Weekly Chart for CarMax
Courtesy of Refinitiv XENITH
The weekly chart for CarMax will end this week neutral with the stock below its five-week modified moving average of $94.97. The stock is well above its 200-week simple moving average or “reversion to the mean” at $62.59.
The 12x3x3 weekly slow stochastic reading is projected to decline to 81.25 this week down from 84.80 on Dec. 13. This reading will likely be below the overbought threshold of 80.00 next week making the weekly chart negative.
Trading Strategy: Buy weakness to the 200-day simple moving average at $84.20 and reduce holdings on strength to the 50-day SMA at $96.00.
How to use my value levels and risky levels
Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play.
The weekly level changes each week. The monthly level changes at the end of each month, the latest on Aug. 30. The quarterly level was changed at the end of June.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.
To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.
How to use 12x3x3 Weekly Slow Stochastic Readings:
My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an “inflating parabolic bubble” as a bubble always pops. I also call a reading below 10.00 as being “too cheap to ignore.”