Used Car Shopping

 | Dec 24, 2013 | 8:27 AM EST
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I've spent the better part of the past two weeks knee deep in the world of automobile sales. From new cars to used cars, I've seen them all. I was already in the market for a car heading into the holiday season, but an unfortunate encounter with a snow plow a week ago meant that I would be looking at buying not one, but two vehicles before the end of the year.

So, it seems only fitting that earnings news from CarMax (KMX) has brought the nation's top used-car-dealer chain (by market capitalization) to my attention on another level. 

As last week wound to a close, CarMax announced that it fell just a penny shy of hitting its third-quarter earnings forecasts. The company posted earnings of 47 cents a share. This was a 15% increase compared with the same quarter last year. Meanwhile, revenue grew 13% over that same period and topped forecasts. Nevertheless, CarMax shares have been plummeting.

CarMax made a new all-time high of $53.08 on Thursday before the earnings news hit the wires. By the end of the week it was trading at $48.08. By Monday's close it had fallen to $47.44.

CarMax's performance over the years was actually part of its downfall over the past several days. CarMax shares were trading as low as $5.76 before the market turned back around at the end of 2008. The company's stock rose steadily until early 2011 when it fell into a period of congestion before resuming its uptrend last year.

But since late spring, the pace of the uptrend had slowed. While CarMax shares continued to see higher highs, the company began to experience stronger corrections in between those highs. This weakening trend action was repeated on the daily timeframe just prior to the recent earnings announcement. Slightly higher daily highs created bull traps, making the latecomers to this bull rally rather nervous.

When a company heads into its earnings season at all-time highs, investors tend to look for something special to drive shares even higher and it takes very little negativity to trigger a decline. The mild miss on earnings was just the start. The little details within the earnings report itself simply didn't help matters.

While its car sales grew, CarMax's gross-profit per vehicle remained steady and net margins remained slim. The number of customers purchasing extended-service plans remained relatively flat, but the company's loan financing income fell as more buyers opted for third-party lenders.

The bull traps that took place as a result of the weakening momentum into earnings also had some help from technical resistance levels in CarMax. Since late 2011, CarMax has rallied nearly 100% compared to the 2008-early 2011 bull run. This measured move zone is typically strong price resistance in any security. The exact price of that resistance point is $24.03, while last Thursday's all-time high was $53.08. A stronger test of that resistance zone would have been even better for the bears, but on a monthly time frame $1 still means a test of that resistance level.


CarMax (KMX) -- Daily
Source: TradeStation


The weakness at this resistance zone also had help from a strong decline in volume that has taken place in CarMax from 2011 until last week. This often indicates hesitancy on the part of the bulls, even though they continued to push shares higher. But the weaker buying made it easier to create an exaggerated selloff following last week's news.


Carmax (KMX) -- Monthly
Source: TradeStation


Overall, many traders and investors are still quite bullish on CarMax in the longer run. And in the longer run they are probably correct. But for now, CarMax remains technically extended and favors continued corrective action in the weeks ahead. The 50% Fibonacci Fan level on the monthly timeframe, shown on the chart in red, will serve as initial major price support. This is the level I will be monitoring as the next support that could kick off a multi-month rally.

Attempts to recover before that level strikes are likely to face greater challenges, such as a choppy uptrend with a great deal of overlap in price levels from one day to the next as opposed to steady buying. Now, even though I'm going to be holding off on buying CarMax stock at these levels, I think I'll head over to its website and have a look around.

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