Ignore Carvana's Backseat Drivers

Innovation will always be met with resistance. To succeed, a company must overcome this resistance.

When a new company called Amazon (AMZN) started selling online in 1995, it chose books as its initial product. Consumers, many of whom were skittish about internet purchases, took comfort in knowing the product would be the same as if it were purchased in a store, only cheaper.

When fast food giant McDonald's (MCD) began selling breakfast all day in 2015, the company was ridiculed by detractors. "Who is going to buy an Egg McMuffin at 5 p.m.?" they asked.

In retrospect, it was a brilliant move. Breakfast is McDonald's most profitable part of the day, so why not extend it? Breakfast all day was a success until it was discontinued in 2020 due to the pandemic.

In the present day, Carvana (CVNA) is attempting to innovate by changing the way autos are sold. The company has been met with ridicule and resistance, mostly due to its use of automotive vending machines. The steel and glass structures are up to 12 stories tall, and can hold up to 36 vehicles.

Carvana is at a distinct disadvantage to Amazon and McDonald's, due to the cost of its products. A new car is a major investment, and while many consumers aren't fond of the established process, they'd rather haggle with a dealer than deal with the unknown.

Because of that issue, I can't say for certain that Carvana will succeed in the long run, so I'm not a long-term investor in the stock. But I am willing to trade Carvana, especially now since the stock's chart has completed a bullish setup.

On Thursday morning, Carvana broke out of a double bottom pattern (curved black lines) to trade at its highest level since February. The bullish pattern formed over a six-month period, and the breakout projects the stock to the $25 area.

Carvana has closed above its 50-day (blue) and 200-day (red) moving averages every day since June 1. This is significant, because prior to June, the last time this stock traded above both of those moving averages was in September of 2021.

While I'm willing to take a trade on Carvana and other stocks, I'm not buying anything for the long term. Despite recent bullish market activity, the rate hikes enacted by the Fed haven't fully been felt. If inflation persists, the Fed may have more work to do.

(AMZN is a holding in the Action Alerts PLUS member club . Want to be alerted before AAP buys or sells stocks? Learn more now. )

At the time of publication, Ponsi was long CVNA and AMZN.

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