Which Way Will KMX Break?

CarMax, Inc., through its subsidiaries, operates as a retailer of used vehicles in the United States. It operates in two segments, CarMax Sales Operations and CarMax Auto Finance. It sells vehicles that do not meet its retail standards to licensed dealers through on-site wholesale auctions, as well as sells new vehicles under franchise agreements. The company also provides customers financing alternatives through its finance operation, CarMax Auto Finance, as well as through its third-party financing providers. In addition, it offers a range of other related products and services, including the appraisal and purchase of vehicles directly from consumers; sale of extended service plans and guaranteed asset protection services; and vehicle repair services.

Take a look at the 1-year chart of CarMax (NYSE: KMX) below with added notations:

After bolting higher from mid-October until the end of December, KMX has been trading sideways over the last 3 months. During the sideways move the stock has formed a common pattern known as a rectangle. A minimum of two successful tests of the support and two successful tests of the resistance will give you the pattern.

KMX’s rectangle pattern has formed a resistance at $68 (red) and a $62 support (blue). At some point the stock will have to break one of the two levels.

The Tale of the Tape: KMX is trading within a rectangle pattern. The possible long positions on the stock would be either on a pullback to $62 or on a breakout above $68. The ideal short opportunity would be on a break below $62.

Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!

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