Carmax (KMX) Running Out of Gas

Look beyond the price uptrend for a clue to KMX's path

   

kmx multi year 300x200 Carmax (KMX) Running Out of GasCar and truck retailer CarMax (NYSE:KMX) had a massive rally off the 2009 lows.  In early 2009 the stock had a price tag of a mere $7.00, which over the course of four years grew to the low $40s.

After consolidating for most of 2011 and 2012, the stock staged a renewed major breakout in November 2012 that may now be looking a little tired.  For a little context, consider that since last June alone CarMax has rallied 70% up to yesterday’s highs of $42.45.  To be sure, the majority of the auto industry saw healthy stock gains over the same months, just look at the auto manufacturers like General Motors (NYSE:GM) and Ford Motor Company (NYSE:F), as well as the auto-parts retailers like Advance Auto Parts (NYSE:AAP).

kmx daily chart 300x266 Carmax (KMX) Running Out of Gas
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The closer up daily chart of CarMax at right reveals that the stock continues to trade in a narrow bur orderly up-trending channel dating back to October 2012, just before the big breakout highlighted on the first chart.  The uptrend is well supported at the lower end by the stock’s 50 day simple moving average and, a little lower, the 100 day simple moving average.

This all sounds nicely bullish, yet in recent days and weeks a few signs of concern have popped up that should at the very least cause those long the stock to perk up in their seats.

While the stock continued to push marginally higher, momentum as measured by the Stochastic indicator peaked in early March and has been trending down ever since, flashing so-called bearish negative divergence.  Second, on March 6 the stock marked a clearly bearish shooting star candle on its daily chart, right at the top of the up-trending channel.  The high of of that day has since been matched but the stock has failed to close above it on a daily basis.  And finally, yesterday the stock opened up higher only to reverse lower throughout the day, closing decisively negative on the day and leaving a nasty outside candle on the chart.

The stock is now setting up as a good risk/reward short-side play with stops set at yesterday’s highs.  Traders looking to get involved with the name however should keep in mind that the company is due to report earnings next week on April 10.

Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter.


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