CarMax Accelerates Into Fast Lane Ahead of Earnings

CarMax, Inc. (KMX) operates automotive dealerships selling and servicing both new and used vehicles. The stock began 2018 in a bear market decline of 26.5% from an all-time intraday high of $77.67 set on Oct. 3, 2017, to the 2018 low of $57.05 set on April 4. The stock turned on a dime at this low on a positive reaction to forward guidance. CarMax shares closed Wednesday at $72.77, up 13.5% year to date and in bull market territory at 27.6% above the April 4 low. The stock set its 2018 high of $74.45 on June 11 between my quarterly pivot of $71.76 and my semiannual pivot of $73.76.

Analysts expect CarMax to report earnings per share of $1.22 to $1.25 when the company releases results before the opening bell on Friday, June 22. The used car segments will likely drive earnings, and year-over-year comp sales have been weaker than expected in recent quarters. Some say that millennials are driving less than prior generations. Keep in mind that auto loans are at a record high, and defaults are beginning to surface. (See also: American Debt: Auto Loan Balances Total $1.22 Trillion in 4Q 2017.)

The daily chart for CarMax

The daily chart for CarMax shows the 26.5% bear market decline from the October 2017 high to the April 2018 low. This volatility has been consolidating since then. The horizontal lines are the key levels from my proprietary analytics. The horizontal line at the top of the graph is my annual risky level at $78.00. The stock is between my quarterly pivot of $71.76 and this week's risky level of $75.11. In between is my semiannual pivot of $73.76. On a negative reaction to earnings, the downside is to $66.44 in July.

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The weekly chart for CarMax

The weekly chart for CarMax is positive but overbought, with the stock above its five-week modified moving average of $69.09. The stock is above its 200-week simple moving average at $61.01 and has been above this "reversion to the mean" since the week of April 20, when the average was $60.25. The 12 x 3 x 3 weekly slow stochastic reading is projected to rise to 89.01 this week, up from 87.28 on June 15.

Given these charts and analysis, my trading strategy is to buy CarMax shares on weakness to my monthly value level of $66.44 and to reduce holdings on strength to my annual risky level of $78.00. (For more, see: AutoNation vs. CarMax: Comparing Under the Hood.)