Carmax (KMX) just might have found the road to higher prices. Just maybe… (December 21, 2015)
KMX
I want to look at CarMax ( NYSE:KMX ) today. First of all you can see this has been actually a fairly orderly move in this stock. This is a weekly chart; you see a good strong uptrend over a lot of months, then sideways consolidation, and then another move higher. The difference, of course, is that the stock isn’t consolidating now, it’s actually cut right through the 200-day or 40-week moving average and is now trending lower. Well the big volume spike here is pretty ominous. So you look at this and you can see how the stock traded down big on Friday when they reported earnings and missed on revenues.
So when a stock, that is supposed to be a growth stock, reports revenues that are less than expected, that’s a big deal. I’m looking at this and this could be a climax low here, this is known as a “dragonfly doji”, when it occurs within a steep decline, and I would say this is a fairly steep decline, 30 percent, when it occurs within a steep decline it can indicate a reversal, where the stock gaps down trades down REALLY low and then moves higher and closes near the high. This can kind of suck you in, because you’re anticipating this kind of move higher. Well we didn’t get that today and the reason is because RBC Capital maintained their rating but they cut their price target from 65.00 to 58.00.
So the stock gaps down again today, trades on pretty decent volume, not Friday’s volume but a pretty solid volume relative to the average. But it also closes up near, or at least in the top half of the intraday range. So I’m looking at this and I’m not a bottom fisher, I don’t like to try to get that stuff because it tends to have a tougher climb on the way up, because there’s a lot of people that are wrong about the stock and they want to sell into any rally. But, if you’re looking for that type of trade, this is your opportunity, right here with a stop a little bit below $50.00. So frankly you could put a stop below 50.57, which was Friday’s intraday low. The whole ideas is that this Friday was an actual capitulation and that’s the last of it; and then maybe even RBC will be right and the stock will come up to $58.00.
So you can buy this right now with a stop just a little bit below Friday’s intraday low. Or, you can have an even higher probability trade, though it’s a little more or a risk, if you wait for the stock to surpass Friday’s intraday high, which was 53.90. Because you think about it, if you’re buying the stock now, yes you know what your defined risk is, but really you’re only up 2.7 percent before the stock tests this high. So you can go ahead and forego that profit by waiting until the stock does surpass the high and then you’ve got quite a bit of more room for the stock to climb. Or, my personal favorite, you can split the difference. You can take some now and then add to that position if the stock does move above Friday’s intraday high.
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