Short Trader: CarMax Slips Into Reverse

After some sputtering, the shares of the used-car company have broken below a key level.
Author:
Publish date:

Editor's note: Formerly, Dan Fitzpatrick's short trading ideas were available only to subscribers to TheStreet.com's Short Advisor. Now these picks are being offered to RealMoney and TheStreet.com readers.

It's not tough to find weak stocks these days. In fact, it's a bit more difficult to find stocks that look like great buys. Most seem just not quite right for either buying or selling -- they're just too choppy.

One method of selecting short candidates is to watch how they act around a key moving average, like the 50-day moving average. If a stock bounces off the 50-day moving average repeatedly, then you know the bulls are in charge.

However, when a stock

stops

bouncing off the 50-day moving average, then you know that something's changed -- the bulls are no longer having their way.

CarMax

(KMX) - Get Report

fits into that category now. After consistent bounces off the 50-day moving average, the stock gapped down below that level on Tuesday and closed even lower yesterday, at $52.70.

Let's look at the chart (below).

The stock has been down three consecutive days, yet it is not oversold. Still, I'd love to see the shares rally for a day or so to test the 50-day moving average.

If that does happen, then look to short the stock at around $55, with a stop just above $57.50.

However, the entry I've drawn in on the chart below is just below Wednesday's low, down at $51.95. If this short trade setup is triggered, put a stop up at $55.50.

The potential target is down at $44 a share.

CarMax (KMX) -- Daily

Updates on Previous Short Picks

Microsoft : The entry for this short idea was $29.20, and the trade is working fine The current buy-stop at $30.25 should be lowered to $29.50. Shares of Microsoft closed at $28.17 Wednesday.

Netflix's entry price was at $23.50, and this short trade also continues to work. The stock has been trading sideways for a while and is at the bottom of its range, closing at $22.53 Wednesday. The current buy-stop remains at $24.01.

NutriSystem offered the entry at $46.60 last week. The stock continues to decline along the middle Bollinger Band, closing at $45.15 Wednesday. To minimize the risk, lower the buy-stop from $50.95 down to $47.75.

At the time of publication, Fitzpatrick held no positions in the stocks mentioned, although holdings can change at any time.

Dan Fitzpatrick is the publisher of StockMarketMentor.com, an advisory newsletter and educational forum dedicated to teaching effective risk management and trading methodologies to aspiring traders and investors. He is a former hedge fund manager and a member of the Market Technicians Association, and he now trades from his home in San Diego, Calif. While Fitzpatrick holds various securities licenses, he does not give recommendations to buy or sell stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. He appreciates your feedback;

click here

to send him an email.