This image was made through Midjourney using this prompt: A five-story Carvana car vending machine crumbling to the ground.
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Maybe Carvana is Not the House of Car(d)s That Short-sellers Imagined?

By:Thomas Westwater

Carvana stock is surging as a short squeeze attracts reddit’s attention. Where have we seen this before?

  • A surprise earnings report earlier this year fueled interest in Carvana.
  • This rally may have more room to run.
  • Traders might prefer to want to wait for a dip before going long.

Carvana (CVNA) is surging higher during Monday trading, extending a 21% surge on Friday that saw the stock hit its highest level since September 2022.

The upward action comes amid a lackluster day in broader financial markets, with the S&P 500 (/ES) nearly flat and the Nasdaq (/NQ) dropping about 0.7%.

Investors and analysts have been bearish on Carvana stock over the last several quarters. The used-car retailer performs as an online marketplace for consumers, essentially stripping out the traditional dealership model. You’ve probably seen one of their iconic glass-tower storage vending machines along the highway.

Short squeeze in play as WSB joins the fight

Analysts have been bearish on Carvana recently, but a surprise earnings report earlier this year whetted retail traders' appetite. While not as popular as GameStop (GME) or other traditional meme stocks, Carvana has attracted the attention of Reddit’s infamous WallStreetBets sub.

Today, Carvana is the fourth-most-discussed stock on WallStreetBets over the past 24 hours, according to ApeWisdom—a sentiment tracker website. WSB’s cohort of traders typically targets stocks that are heavily sold short, increasing the susceptibility to a squeeze.

That is likely what is causing the big price surge. As the price of a stock rises, it forces shorts to cover their positions. As traders close their shorts they buy the shares back, adding to the bid pressure on the stock price. This creates a feedback loop, causing even more shorts to close, creating a short squeeze.

With over 60% of the float sold short, this rally may have more room to run. The company is set to report financial results on Aug. 3, and management previously stated that they expect to have a positive adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) by then.

Battle of longs versus shorts

That said, it's a battle between longs and shorts until the earnings release. And, so far, the longs appear to be winning. However, used car sales data released this morning bodes poorly for Carvana. Used car prices in the United fell 4.2% in June from a month earlier. That means the bid-ask spread Carvana collects on its existing inventory will be reduced.

Alternatively, this could also help Carvana with its new inventory in the future. Amid pressure from higher interest rates, lower prices may help attract more buyers to the used car market. Still, consumers remain rather resilient and continue to opt for new cars, including electric vehicles.

Carvana technical analysis

The daily price chart displays some incredible strength dating back to early May, when prices started to trend higher, but with several gaps. The relative strength index (RSI) has nearly crossed above the 70 “overbought” level again, underpinning the move’s resiliency.

During the past couple of months, the 50-day simple moving average (SMA) has also crossed above the longer-term 200-day SMA, resulting in a golden cross pattern. While these developments point to a bullish technical landscape, prices are at the top of a regression channel. Traders may want to wait for a dip before getting long.

Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater

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