AutoZone, Inc. (AZO) is a retailer of aftermarket auto parts and accessories that are usually cheaper than the branded parts available at automobile dealerships. The company extended its winning streak of beating earnings per share (EPS) estimates to 10 consecutive quarters. The stock popped to an all-time intraday high of $1,274.40 when it reported on Dec. 10. This was above its monthly risky level at $1,249.51 as an opportunity to reduce holdings.

This stock is a pure play on momentum, but not on valuation, as the company does not offer a dividend. The stock has been above a "golden cross" for more than a year, and thus, the strategy is to buy on weakness to its 200-day simple moving average (SMA), which is now at $1,102.42.

AutoZone stock closed Thursday, Dec. 26, at $1,210.72, up 44.4% year to date and in bull market territory at 51.4% above its Jan. 8, 2019, low of $738.41. It is currently trading 5% below its all-time intraday high of $1,274.40 set on Dec. 10. The company has been in expansion mode, building new stores as more older vehicles require repairs. With expansion comes increased costs of technology and payroll. 

The daily chart for AutoZone

Daily chart showing the share price performance of AutoZone, Inc. (AZO)
Refinitiv XENITH

The daily chart for AutoZone shows that the stock began 2019 above a "golden cross," which was confirmed on July 19, 2018. This bullish signal occurred when the 50-day SMA rose above the 200-day SMA, indicating that higher prices lie ahead. The stock is now above its 50-day and 200-day SMAs at $1,173.16 and $1,102.40, respectively.

The close of $838.34 on Dec. 31 was an important input into my proprietary analytics, and the stock's annual pivot is $993.23, which was a magnet and buy level between March 21 and May 21, when the stock reacted positively to strong earnings. Its second half value level is $958.78. Its fourth quarter pivot at $1,168.86 was a magnet between Nov. 7 and Dec. 9, the date before the latest earnings pop. The stock failed to hold its December risky level at $1,249.51 on Dec. 12.

The weekly chart for AutoZone

Weekly chart showing the share price performance of AutoZone, Inc. (AZO)
Refinitiv XENITH

The weekly chart for AutoZone is positive but overbought, with the stock above its five-week modified moving average of $1,186.06. The stock is well above its 200-week SMA, or "reversion to the mean," at $801.69. This was last crossed during the week of July 27, 2018, when the average was $684.94.

The 12 x 3 x 3 weekly slow stochastic reading is projected to slip to 82.33 this week, down from 84.85 on Dec. 20. At the July 16 high, this reading was 90.69, above the 90.00 threshold as an "inflating parabolic bubble," and from the July 16 high of $1,186.60 to the Aug. 13 low of $1,032.60, the stock slumped by 12.9% as this bubble popped.

Trading strategy: Buy AutoZone shares on weakness to the quarterly value level at $1,168.86 and to the 200-day SMA at $1,102.39. Reduce holdings on strength to this month's risky level at $1,249.51.

How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31, 2018. The original annual level remains in play. The close at the end of June 2019 established new semiannual levels, and the semiannual level for the second half of 2019 remains in play. The quarterly level changes after the end of each quarter, so the close on Sep. 30 established the level for the fourth quarter. The close on Nov. 29 established the monthly level for December.

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 shares 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 their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting 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 refer to a reading below 10.00 as "too cheap to ignore."

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.