On Dec. 11, Dollar General (NYSE:DG) fell 7.8% on the back of news that the dollar store will cut prices, dragging the stock prices of rivals Dollar Tree (NASDAQ:DLTR) and Family Dollar (NYSE:FDO) right along with it.
From a technical point of view, all three stocks currently offer juicy risk/reward for a long-side trade. These stocks are bounce-worthy, and better yet, have defined risk (a clear stop) at the Dec. 11 lows. The clear stop levels, if breached, could then also set the stocks up for a short-side try for nimble traders.
Out of the three stocks, my favorite candidate for a bounce is Dollar General. Let’s look at the charts:
From a somewhat longer-term point of view, note that DG had solid support (green line) near $26.50 during the second half of 2010 and 2011, which ultimately lead to a breakout past a resistance line (red) in August 2011. At this point, the stock went on a 62% tear over the course of the next 10 months until buyers simply couldn’t be found higher any longer in July 2012.
DG has been sliding lower ever since, and currently is about 12% off its July lows. The series of lower highs and lower lows since July has come as broader equity markets marched in the opposite direction as per the chart below; Dollar General in blue, the S&P 500 in orange.
The weakness over recent months in the stock price of Dollar General has taken its price down to a 50% retracement level (support) of the entire rally that started in August 2011. At the same time, especially after the selloff on Dec. 11, the stock was and remains oversold as per the stochastic oscillator, among other momentum indicators.
And very close-up, the stock developed a so-called piercing pattern. The big Dec. 11 selloff produced a long, red candle, which the next day was followed by a lower open and an intraday rally that led the stock to close more than 50% up the previous day’s red candle. The logic behind this type of reversal pattern is that sellers got exhausted and were quickly overtaken by buyers on Dec. 12. This should see follow-through buying over coming weeks, and as described earlier, should the stock drop below the lows of Dec. 11, any long position based on this setup can easily (and without emotion) be closed out.
Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter here.