We love the deep-discount retail sector, especially these days.  We have a position in Dollar Tree (NASDAQ:DLTR) in our Winning Edge service that’s performing very well.  We all know the reason why:  The current economic malaise, consumer uncertainty, poor job market, etc., are conspiring to push buyers down the retail chain into the laps of the Family Dollars (NYSE:FDO) and Dollar Trees and Dollar Generals (NYSE:DG) of the world.

Family Dollar reports earnings before the open on Wednesday, with analysts expecting a relatively modest 63 cents a share.  We say modest because represents growth of just 12.5% from a year ago compared to the average gain of 22% seen in the past four quarters. 

The problem for FDO lately is that its record of beating the analysts’ estimate has been spotty.  Two of the past three quarters have been misses, although you have to go back another 14 quarters to find the next miss.  Performance after recent reports has been iffy as well — two up and two down in the past four quarters, including a major 9% one-day plunge in January. 

The chart shows FDO at a key level.  The shares are up more than 20% off the August low.  But they are now approaching the $55 level, an area that has defined tops several times this year.

Despite this potential resistance, we like FDO ahead of earnings.  Expectations are modest, suggesting that FDO should exceed the analyst number.  Just four of 20 consider the stock a buy, which is hard to understand given that the stock is up nearly 10% for the year.  And the put/call ratio is putting in a relative peak at a level that has coincided with recent bottoms in the shares. 

Given the modest sentiment surrounding the shares, Wednesday’s report should give the stock the strength it needs to overcome resistance in the $55 region.  Up next is the all-time high just below $57 reached in May.  Buy the Oct. 52.50 call for around four bucks to leverage the expected move.

Have a great trading week.