AUTOphagous NATION (AN)

All empires eventually fade, most commonly as a function of the moral rot that’s bred of their sudden acquisition of wealth.

It happened to Rome.

And to Britain.

And now it’s happening in America.

Moral rot eventually causes one to behave in a manner that’s self-destructive.

Moral rot leads to a great many health issues, too, that affect both mind and body.

And eventually those diseases eat away at the body itself – the individual’s as well as the body politic of the state.

And that’s what we’re witnessing today – a certain autophagy, accompanied by a very clear autoencephalopathy –both of which are gaining speed.

Alan B. Harvard, will have more to say about this in his weekly rant, but we’re going to leave the matter momentarily to focus on the current autohypnotic trance of the investment world and its effect on stocks like AutoNation Inc. (NYSE:AN).

Who Are These People?

AutoNation is the largest retailer of cars in the U.S.  It offers customers both used and new product as well as insurance and post-purchase parts and service.  The company has a market cap of just over $5 billion and the stock is up 200% in just the last five months.

Along the way, it appears insiders got rather excited and decided to part with 53% of their share holdings, to the tune of slightly less than $60 million!

Do they know something that we don’t?

This is how the daily chart looks for the last six months –

Technically, we have a very bearish picture –

1. To start, RSI went 80+ overbought last month (red circle), and ever since
2. Both RSI and MACD have been diverging lower against price (in green).  That’s as sure a sign as any that momentum is on the wane.
3. In addition, the stock completed a (bearish) rising wedge formation just last Wednesday, when price edged below the lower trendline (in red), action that generally precipitates a fall.
4. Adding weight to the thesis is the bearish engulfing pattern at the top of the move (in blue), a reasonably good indication that a change in intermediate trend is now upon us.
5. AN has several gaps to fill on its path lower, including at $55.50, $53.50, $49.30 and $31.20, though with the moving averages bunched and turning up between 40 and 44, we see little chance of price hitting that last gap.

And with that in mind, we’ve crafted the following gem of financial exquisitery –

A Jew and His Money recommends you consider selling the AN September 18^th 55/60 CALL spread for a $2.50 credit (55 – $4.40; 60 – $1.90) and using the funds to purchase the AN October 16^th 55 PUT for $2.65.  Total debit on the trade is $0.15.

Rationale: the trade is predicated on the expectation that AN has topped and is headed lower.

We’re using a near term (September) CALL spread, therefore, to pay for the longer term, October PUT purchase.

We can do this for almost zero cost.

Should the stock rise, our maximum loss on the CALL spread is $5.00.

But because the PUT is longer dated (October), it will still possess time value at the spread expiration.

We’ll therefore have the opportunity at that point to either sell it (to mitigate any loss), or hold it with the expectation of a subsequent decline.

Maximum loss in the trade is, therefore, less than $5.00.

Maximum gain is unlimited.

With kind regards,

Hugh L. O’Haynew

Follow @HughLOHaynew