Discount retail store operator Dollar General (DG) reported its latest earnings yesterday, and courtesy of a weak report across the board, DG shares closed 9% lower on the day, taking many of its competitors — namely Family Dollar (FDO, -2%) and Dollar Tree (DLTR, -1%) — with it as well.
They say the reaction to the news is more important than the news itself. I find this holds especially true when using technical analysis. While Tuesday’s selloff in the stock broke the near-term chart, the long-term chart also took a good punch.
Although the multiyear simple uptrend line in Dollar General remains intact, the stock did develop a notable double top with its tops in July 2012 and just recently in May. In fact, if we look closely enough, the May high served as a bearish lower high vs. the July 2012 highs.
From where I sit, this isn’t necessarily the sign of any major demise for the stock, but it could lead the stock to increase its attraction toward the multiyear uptrend line, which currently comes in near the $46 area.
On the daily chart, Tuesday’s breakaway gap is better visible. The day’s selloff left an airpocket above it, some of which might need to be filled before DG can continue a move lower. Furthermore, Tuesday’s breakdown in the stock came to a halt right at its 200-day simple moving average.
As each stock has its own personality, they each react differently to their various moving averages. In the case of Dollar General, the stock has shown very little respect for its 200-day moving average, which leads me to assign little importance to Tuesday’s lows as it relates to an area of support.
The selloff also only resulted in the stock retracing a little more than 38.2% of its year-to-date rally. Given the steepness of the one-day selloff, I think it should stand a good chance of retracing 50%-61.8% of the 2013 rally, which would get the stock closer to the $46 area and thus toward the aforementioned multiyear uptrend.
In such case, whether the stock eventually will hold the multiyear uptrend is simply too early to tell.