CarMax, Inc (KMX) operates automotive dealerships selling and servicing mostly used vehicles, which have seen stable demand since January 2016 as the stock tracked its 200-week simple moving average, or "reversion to the mean," higher. What we are seeing today is a dip below this key trend, which we have seen before. The stock closed Wednesday, Dec. 19, at $57.78, down 9.9% year to date and in bear market territory at 29.3% below its all-time intraday high of $81.67 set on June 22.
Analysts expect CarMax to report earnings per share of $1.01 when it discloses results before the opening bell on Friday, Dec. 21. The company has a history of seeing share price volatility in reaction to results. For example, the year-to-date low of $57.05 set on April 4 followed earnings reported on that date, and the positive reaction to earnings on June 22 helped the stock set its all-time high. On Sept. 26, a higher open was short lived, and the stock has struggled since then. The company is currently opening new stores, so it is optimistic about growth, particularly in the pre-owned vehicle segment.
The daily chart for CarMax
The daily chart for CarMax shows that the stock began 2018 well below my annual risky level of $78.00, as shown by the horizontal line at the top of the chart. The stock set its 2018 low of $57.05 on April 4 on a negative reaction to earnings. Then, on June 22, it set the 2018 high at $81.67 on a positive reaction to earnings.
The top horizontal line is my annual pivot at $78.00, which was a magnet between June 22 and Sept. 26. The second horizontal line is my semiannual pivot at $75.35, which was a magnet between July 5 and Sept. 28. Since then, the stock is knocking on the April 4 low of $57.05.
The weekly chart for CarMax
The weekly chart for CarMax is negative but oversold, with the stock below its five-week modified moving average of $63.78. The stock is also below its 200-week simple moving average at $62.76, which is also its "reversion to the mean." Note how the stock has been climbing the 200-week simple moving average since week of Jan. 8, 2016, when the average was $48.59. The 12 x 3 x 3 weekly slow stochastic reading is projected to slip to 15.22, down from 18.00 on Dec. 14, with both readings below the oversold threshold of 20.00.
Given these charts and analysis, my trading strategy is to buy CarMax shares on weakness to the April 4 low of $57.05 and reduce holdings on strength to the 200-week simple moving average at $62.76.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.