CarMax, Inc. (KMX) is the largest used-car retailer in the United States, and the stock has been in recovery mode since trading as low as $55.24 on Dec. 20. Like so many stocks I have been profiling, CarMax is consolidating a bear market decline. The stock closed Wednesday, March 27, at $63.84, up just 1.8% so far in 2019 and up 15.6% from its Dec. 20 low. Even so, the stock is still in bear market territory at 21.8% below its all-time intraday high of $81.67 set on June 22, 2018.
Analysts expect CarMax to report earnings per share of $1.04 when the company discloses results before the opening bell on Friday, March 29. Earnings volatility has been significant for this used-car retailer. The all-time high was set on June 22 in reaction to earnings, but the stock turned on a dime. A similar reaction occurred when the company reported on Sept. 26. The day following the low set on Dec. 20, the stock popped higher on earnings.
The reaction to this current earnings report should also be volatile, as the stock has been rebounding this week. CarMax has been opening new stores and expanding online vehicle sales. Some say that the company has been struggling with slowing foot traffic, which could be a drag on earnings and forward guidance.
The daily chart for CarMax
The daily chart for CarMax shows the formation of a "death cross" Nov. 29, when the 50-day simple moving average fell below the 200-day simple moving average to indicate that lower prices would follow. This tracked the stock to its Dec. 20 low of $55.24.
The stock closed at $62.73 on Dec. 31, which was an important input to my proprietary analytics. This resulted in a semiannual value level at $57.67 and quarterly and annual risky levels at $68.31 and $76.91, respectively. The close of $62.10 on Feb. 28 was also input into my analytics and resulted in a monthly pivot at $62.04, which has been a magnet ahead of earnings. The 200-day simple moving average at $68.44 lines up with the quarterly risky level.
The weekly chart for CarMax
The weekly chart for CarMax will be positive if the stock ends the week above its five-week modified moving average of $61.81. The stock is also above its 200-week simple moving average, or "reversion to the mean," at $62.22. Note how the stock has been climbing back and forth around this key 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 rise to 43.87 this week, up from 40.08 on March 22.
Trading strategy: Buy CarMax shares on weakness to the monthly pivot and weekly value level at $62.04 and $61.14, respectively, and reduce holdings on strength to the 200-day simple moving average at $68.32.
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 quarterly, semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of January and February.
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.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.