Lithia Motors Could Correct Lower in the Weeks Ahead

Avoid the long side for now.

In his first "Executive Decision" segment of Mad Money Wednesday evening, Jim Cramer spoke with Bryan DeBoer, president and CEO of Lithia Motors (LAD) , the auto dealer network that is rolling out Driveway.com, an at-home alternative to buying and servicing cars at a dealership.

DeBoer explained that Driveway is offering at-home services for car owners, allowing them to get their cars serviced right in their driveway. The website also has 20,000 used cars for purchase on the site, complete with delivery and a 7-day return policy. DeBoer said that number will soon be expanding to 40,000 cars as the company enters new markets with Driveway.com.

When asked why people are buying cars in the middle of a pandemic, DeBoer explained that there are actually a lot of cost savings when you don't drive to work every day and people are moving their gas and coffee budgets to invest in new vehicles.

In addition to their online operations, Lithia also is actively buying up profitable car dealerships across the country. DeBoer said it typically takes three to five years to acquire a dealership, as many are family owned and require long relationships before deals get done.

Let's check out the charts of LAD to see what sort of relationship they have with investors.

In this daily bar chart of LAD, below, we can see that prices are up nearly five-fold from their March low. Prices climbed to a high in August and then corrected lower for about six weeks before rallying to a slight new high this month. This movement has created some movement in the indicators worth pointing out.

LAD is above the rising 50-day moving average line now but traded below the line for the back half of September. Prices are approximately $100 above the rising 200-day moving average line so prices can be considered "extended" or "overbought".

The On-Balance-Volume (OBV) line moves up steadily from March to the end of August. I am not exactly sure how the past two months of movement in the OBV line should be analyzed but the two declines are not constructive despite the line making a new high.

In the lower panel is the 12-day price momentum study. Notice the lower peaks from August to October? This tells us that the pace of the advance slowed and when compared to the higher price highs over the same time period give us a bearish divergence. A slowing advance can be a leading indicator for a reversal. 

 

In this weekly Japanese candlestick chart of LAD, below, we can see the very dramatic advance in prices this year.

 

LAD is trading above the rising 40-week moving average line but notice the movement in the OBV line which made a lower high in October telling us that sellers of LAD have become more aggressive.

 

The Moving Average Convergence Divergence (MACD) oscillator has narrowed significantly and is close to a downside crossover. This potential signal would be a take profits sell signal should it happen. 

 

 

 

In this daily Point and Figure chart of LAD, below, we can see that the software is projecting a potential downside price target in the $240 area. Not all that bearish but there is no guarantee that the decline will end there. 

 

 

Bottom line strategy: LAD sounds like it has an interesting business model but right now the charts suggest the stock price can decline. Avoid the long side for now.

Employees of TheStreet are restricted from trading individual securities.