CarMax, Inc. (KMX) is the largest used car retailer in the United States, and the stock has been in a strong momentum run-up since the end of March. CarMax stock surged to its annual pivot at $76.91 on April 17 after popping above its 200-day simple moving average (SMA) on March 29 when the company released a solid earnings report.

The stock now has a weekly slow stochastic reading above 90.00, making it an "inflating parabolic bubble" as the car dealer prepares to report earnings before the open on Friday, June 21. CarMax shares set an all-time intraday high of $84.99 on Monday, June 17, and closed that day at $83.87, up 33.7% year to date and in bull market territory at 51.8% above the Dec. 20 low of $55.24.

Analysts expect CarMax to report earnings per share of $1.49 to $1.51 when it discloses results before the opening bell on Friday. The stock has a market-neutral P/E ratio of 17.44 but does not offer a dividend, according to Macrotrends. This makes the stock a play on momentum and not a value stock. The used car retailer remains in expansion mode, focusing on expanding stores and improving its online strategy to increase website interest.

The daily chart for CarMax

Daily chart showing the share price performance of CarMax, Inc. (KMX)
Refinitiv XENITH

The daily chart for CarMax shows the formation of a "golden cross" on May 7, when the 50-day simple moving average moved above the 200-day simple moving average to indicate that higher prices would follow. This tracked the stock to its all-time high of $84.99 set on June 17.

The stock closed at $62.73 on Dec. 31, which was an important input to my proprietary analytics. The annual pivot at $76.91 was a magnet between April 17 and May 29, and it is now an annual value level. The stock is above this week's pivot at $81.62.

The weekly chart for CarMax

Weekly chart showing the share price performance of CarMax, Inc. (KMX)
Refinitiv XENITH

The weekly chart for CarMax is positive but overbought, with the stock above its five-week modified moving average of $78.78. The stock is above its 200-week simple moving average, or "reversion to the mean," at $62.94. The latest momentum run-up began from this average during the week of March 29, launching the earnings rally.

The 12 x 3 x 3 weekly slow stochastic reading is projected to rise to 92.14 this week, moving above the 90.00 threshold as an "inflating parabolic bubble." This bubble almost always pops with a decline of 10% to 20% over the next three to five weeks.

Trading strategy: Buy CarMax shares on weakness to the annual value level at $76.91 and reduce holdings above the weekly pivot at $81.62 on the high probability that the bubble will pop.

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 semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of each month; the quarterly level was changed at the end of March.

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.

The close on June 28 is the second most important input to my proprietary analytics for 2019. This close will generate new weekly, monthly, quarterly, and semiannual levels.

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.