Shares of retail car company Carvana (CVNA) jumped 8% higher on Wednesday but the stock is still in technical trouble.
On January 3, the well-known short selling research firm Hindenburg Research published a blistering report and outlook covering Carvana.
The report details claims “accounting manipulation and lax underwriting have fueled temporary reported income growth – all while insiders cash out billions in stock.” Among other negative claims.
It is always important to state that short selling firms like Hindenburg profit from their negative reports by shorting the stocks they cover.
Shares of Carvana have posted an impressive recovery over the last two years. In 2022, shares had dropped more than 90% from their post-pandemic highs.
There were a number of contributing factors to the decline including the effect of higher interest rates on the company’s sales and the higher cost of servicing its debt.
In 2023, Carvana took significant steps to strengthen its financial position.
In the second quarter, the company repurchased $250 million of its 2028 Senior Secured Notes and raised $350 million through an at-the-market (ATM) equity program. The actions aimed to reduce debt and interest expenses, enhancing Carvana's financial flexibility.
The stock has rallied more than 3,000%, though still falling almost 50% short of it’s all-time highs.
Today, the stock is battling with negative momentum as it faces a shift in the technical picture.
Carvana’s 50-day moving average turned bearish last week as the stock tested $175. Since then, shares have rallied to $212, but short-term resistance from its 20-day trendline is currently keeping the stock from moving higher.
Shares were technically oversold at $175 suggesting that the stock is experiencing a short-term “dead cat bounce”. If true, Carvana faces another round of selling pressure that would cause the stock to drop below $175 to the target of $157.
That price it the site of the stock’s current 200-day moving average, a widely watched technical trendline.
Expect to see a stall in Carvana’s recent rally with a high probability that the stock will revisit recent support.
From a long-term perspective, Carvana stock is well above its 20-month moving average indicating that the stock remains in a long-term bull market trend.
Carvana announces its current quarter’s earnings results on February 20.