NEW YORK (TheStreet) -- CarMax (KMX) reports quarterly earnings before the opening bell on Friday. Despite missing analysts' estimates three months ago, it's become a momentum stock, setting a new all-time intraday high at $60.66 on Dec. 11. Analysts expect that declining gasoline prices led to improved sales of used cars in the quarter that ended in November.
Analysts expect CarMax to report earnings of 64 cents a share, but given missed earnings in three out of the last four quarters, shares have been volatile. One factor that could force shares to a new high following earnings is that the stock has recently been reported as being the #11 company on the list of most-shorted stocks of the S&P 500 (SPY) . Let's look at the daily and weekly charts first, and then present the investment profile with exit strategies.
Here's the daily chart for CarMax.
Courtesy of MetaStock Xenith
The daily chart for CarMax ($60.11) shows that the stock has had a volatile ride in 2014, after missing three out of the last four quarterly earnings reports. The stock began the year below its 200-day simple moving average (green line) at $47.53 on Jan. 2. CarMax traded back and forth around the 200-day SMA until April 3. When the company reported an earnings miss on April 4, the stock declined to its 2014 low at $42.54 on April 15. From the 2013 high at $53.08 on Dec. 19 to the April 15 low, the decline was 20%.
Talk about volatility!
After reporting an earnings beat on June 20, the stock gapped 19% higher from the June 19 close at $45.28 to as high as $53.67 on June 20. The stock moved sideways since then until the earnings miss on Sept. 23, when the stock gapped lower by 11% from $52.91 on Sept. 22 to $47.05 on Sept. 22.
Weakness continued to as low as $43.27 into Oct. 15 before the stock began a momentum runup helped by the market and by the conjecture that the company would benefit from renewed demand for used cars, given the lower gasoline cost.
From the Oct. 15 low to an all-time intraday high at $60.66 on Dec. 11, the stock surged by 40%. But it was below its 200-day SMA between Sept. 25 and Oct. 21. The 200-day SMA is now at $49.70.
Here's the weekly chart for CarMax.
Courtesy of MetaStock Xenith
The weekly chart for CarMax shows that the stock has been above its 200-week simple moving average (green line) since September 2009, when this average was $17.79. Investors should be aware that the stock is 104% above its February 2007 high at $29.44 before the crash of 2008. The stock traded as low as $5.76 in November 2008.
The weekly chart is positive but overbought, with its key weekly moving average at $56.59 and its 200-week simple moving average now at $39.38. The momentum reading shown in red at the bottom of the graph is at 91.00 -- well above the overbought threshold at 80.00.
Here's how to trade CarMax.
Investors looking to buy CarMax ($60.11) on weakness should enter a "good 'til canceled" limit order to buy weakness to a key technical level at $46.75.
Investors looking to book profits on CarMax enter a "good 'til canceled" limit order to sell at a key technical level at $62.05. Investors should also consider a sell-stop below the key weekly moving average at $56.60 knowing that this average will be rising each week.
TheStreet Ratings team rates CARMAX INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate CARMAX INC (KMX) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance, growth in earnings per share, increase in net income and notable return on equity. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."
You can view the full analysis from the report here: KMX Ratings Report