Carvana: shifting gears toward a potential breakout

Key Points

• Favorable market conditions for breakout stocks with S&P 500 ETF Trust up almost 6% in two weeks and blue chips like Microsoft nearing new highs.
• Carvana gained over 30% in the past week, reclaimed key SMAs, and exceeded earnings expectations despite revenue decline.
• CVNA shows a potential short-term uptrend with a bullish wedge and near the $35 breakout level, while a high short interest of 17.04% could amplify any potential breakout impact.

As the market trends higher, with the SPDR S&P 500 ETF Trust NYSE: SPY up over 6% over the previous two weeks and many blue chip stocks soaring higher and even closing in on new highs, such as Microsoft NASDAQ: MSFT, it might be a good time to familiarize yourself with stocks setting up for a breakout. 

If the market continues to hold up and can correct and consolidate over time, instead of digesting this move with price by means of a pullback, then individual stocks with bullish momentum could break out and continue higher.

One stock experiencing positive momentum after posting earnings and consolidating near its earnings highs is Carvana NYSE: CVNA. The stock is up over 30% over the previous week and has reclaimed key Simple Moving Averages (SMA).

So, as the stock nears a potential breakout level, let’s take a closer look at the setup in CVNA and the catalysts that have helped the stock surge higher in the short term, which could provide added momentum going forward.

Carvana tops earnings expectations

Carvana reported better-than-expected earnings of $3.60 per share in its latest financial results, surprising the street as analysts expected the company to report a loss. However, the company's revenue declined by 18% year-over-year and 7% quarter-over-quarter, largely attributed to lower retail prices. In the third quarter, Carvana sold 80,987 retail units, surpassing analyst predictions, but experienced a 21% decrease compared to the previous year. 

Despite these challenges, the company's gross profit per unit (GPU), a key metric for the company, showed significant growth with an overall GPU of $5,952 (up 70% from the previous year), retail GPU at $2,692 (a 138% increase from the previous year), and wholesale GPU at $618 (up 38% from the previous year). Carvana's CEO, Ernie Garcia, expressed satisfaction with the strong GPU performance. 

Despite the recent earnings surprise, analysts remain cautious on Carvana stock, with a Reduce rating based on twenty-two analyst ratings. Although the consensus analyst price target sees almost 12% upside for the stock, only one out of the twenty-two analysts have CVNA as a Buy. Sixteen have rated the stock as a Hold, and five rated it as a Sell.

In the short term, though, the setup and short interest in CVNA might be the most relevant factors that can cause the stock to trade higher, purely from a technical analysis point of view. 

CVNA forms a bullish wedge as short interest remains elevated

CVNA has successfully regained two crucial short-term moving averages following its strong earnings report. And now, the stock is trading above the 5-day and 20-day SMA, suggesting positive short-term momentum. It's noteworthy that CVNA has made multiple attempts to breach the $35 threshold but has struggled to maintain this level. Nevertheless, the stock is still near this crucial breakout point. Looking ahead, $35 assumes the role of a pivotal inflection point, and a sustained breakthrough above this mark could trigger substantial upward momentum.

Another factor to consider is the substantial short interest in CVNA. As of October 15, the stock has 32.2 million shares sold short, accounting for 17.04% of the float. Although the probability of a short squeeze may not be exceptionally high, it's essential to take note of this elevated short interest figure, as it can amplify the impact of a potential stock breakout.