Shares of used car retailer Carvana (CVNA) have come roaring back in recent weeks, but Jim Cramer told Mad Money viewers Thursday night that the party may be over as we enter the second half of the year.
Used car inflation accounted for nearly a third of the 4.2% rise in the latest consumer price index. This inflation makes total sense given that new car production has been crimped. Used cars are simply picking up the slack. But does that demand have staying power?
Thursday there were a pair of conflicting analyst reports on Carvana. JPMorgan downgraded the stock, while analysts at Jefferies raised their price targets. After reading both reports, Cramer said he's siding with the bears at JPMorgan.
As new car production ramps higher and we enter the seasonally sluggish back half of the year, Carvana's growth isn't likely to continue.
Cramer advised taking profits in Carvana ahead of what will likely be a tough six months for the used car market.
Let's kick the tires of the charts and indicators.
In this daily bar chart of CVNA, below, we can see that prices made a large outside day and lower close on Wednesday and Thursday. This two day reversal pattern is well known to futures traders who use leverage but perhaps less important to stock investors. We want to watch for carryover selling in today's trading.
Prices are still above the rising 50-day moving average line and the rising 200-day line. The trading volume this month has been less than what we see (below) for May so that suggests that traders are not ready to push prices to new all-time highs.
The On-Balance-Volume (OBV) line has not broken above its April zenith either. The Moving Average Convergence Divergence (MACD) oscillator is above the zero line but is less robust than numbers back in December, for example.
In this weekly Japanese candlestick chart of CVNA, below, we see some caution flags. Notice the upper shadow near $320 in January and again this month? Traders are rejecting those levels. We have one more day of price action in the latest candle pattern but it looks like part of a reversal pattern - either a high-wave pattern or a long-legged doji. We'll see.
The weekly trading volume has diminished but the weekly OBV line is still pointed in a bullish direction. The MACD oscillator is crossing to the upside for a new buy signal.
In this daily Point and Figure chart of CVNA, below, we can see a potential upside price target in the $414 area. The chart still needs a trade at the $324.72 area for a breakout, and a reversal to the downside is always a possibility.
In this weekly Point and Figure chart of CVNA, below, we can see a potential price target of $424, but again a reversal is possible.
Bottom line strategy: I side with Jim Cramer and recommend taking profits on CVNA.