We're Sticking With Our Carvana Strategy

In his first "Executive Decision" segment of  Mad Money Friday evening, Jim Cramer spoke with Ernie Garcia, chairman and CEO of Carvana (CVNA)  the used car retailer.

Garcia said Carvana continues to see lots of demand, which is a good thing, but a shortage of vehicles continues to be a problem. Garcia said they've always struggled finding enough cars due to their fast growth, but this time might take awhile given how the entire supply chain has been affected.

Turning to the topic of labor costs, Garcia said Carvana's inspection centers have become very efficient at inspecting, fixing and preparing cars for resale at consistent prices. So far, labor has not been an issue.

Finally, when asked about competition, Garcia noted that auto retail hasn't changed in decades, which leaves a lot of room for innovation. Carvana aims to simplify the car buying journey for its customers, and that offers a lot of value.

Let's check out the charts again.

In our last review of CVNA on July 8 we wrote that, "Some of the indicators for CVNA are bullish, but they are not strong enough to recommend going long. I would continue staying on the sidelines with CVNA. Weakness in the broad market averages could easily spill over to CVNA." 

In the updated daily bar chart of CVNA, below, we can see that staying on the sidelines since early July has paid off. The shares have been trading below the declining 50-day moving average line and are now below the cresting 200-day line.

The On-Balance-Volume (OBV) line shows weakness from early August and that tells us that sellers of CVNA have been more aggressive. The trend-following Moving Average Convergence Divergence (MACD) oscillator crossed to a cover shorts buy signal last month but remains below the zero line and has begun to narrow towards a new downside crossover. 

In the weekly Japanese candlestick chart of CVNA, below, we can see a mixed picture. Prices have been trading below the cresting 40-week moving average line but the recent lower shadow tells us that traders have rejected the lows. Upside follow-through buying has not materialized so the lower shadow is not all that positive.

The weekly OBV line shows a drift lower the past three months and the MACD oscillator is in a decline. 

In this daily Point and Figure chart of CVNA, below, we can see a potential downside price target in the $242 area. 

Bottom-line strategy: So far our strategy of avoiding purchases of shares of CVNA has been prudent. Continue to avoid the long side.

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