Earnings season will continue to hit the retail sector this week as the season comes close to an end.
The focus on this sector has two discount retailers — Dollar Tree, Inc. (NASDAQ:DLTR) and Five Below Inc. (NASDAQ:FIVE) — on our bullish technical list ahead of their announcements. On the other side, Micron Technology, Inc. (NASDAQ:MU) looks ready to take a rest from its intermediate-term bullish run, hinting that traders may want to either sell into the recent strength or think about shorting the stock.
Dollar Tree, Inc. (DLTR)
Discount retailers have been successful at owning a segment of the retail sector that has continued to show strong growth. From a year-to-date perspective, Dollar Tree shares have gained almost 24% against the S&P 500’s gains of about 8%. Against its peers, Dollar Tree has grown almost four times the Retail sector’s performance.
DLTR heads into its quarterly earnings release this week following a familiar pattern. Over the last few years, there has been a tendency to see Dollar Tree shares move lower into their earnings period, reflecting some anxiety from traders.
This quarter, shares of the stock have pulled back from the $100 level ahead of this week’s earnings announcement. The pullback comes immediately after shares hit an oversold reading on August 10 and conveniently frees up some overhead clearance for the stock to move higher after earnings.
The pullback puts DLTR shares in a position to bounce from their 50-day moving average and break back above the shorter-term 20-day moving average, a move that on increased volume would attract technical buyers.
In addition, due to the lack of volatility in the shares of late, the Bollinger Bands have contracted. This means that a slight move higher (above $97.65) would press an increase in upside volatility.
Finally, we always like it when a stock has lowered expectations ahead of earnings. Currently, short interest and Wall Street analysts’ recommendations reflect a lot of pessimism towards Dollar Tree. Only 43% of analysts currently have the shares ranked a buy, and more than seven times the average daily volume is tied-up in bearish short positions that are likely to result in a short covering rally on even a slight earnings beat.
Five Below Inc. (FIVE)
Another discount retailer heading into the earnings confessional this week is Five Below Inc. The company is known for retailing all kinds of closeout and novelty items, a model that has worked as the company has met or beaten analyst earnings and revenue expectations each quarter over the last year.
The chart for Five Below is attractive for the bulls. Shares just bounced out of a short-term oversold situation and are eyeing a move higher as the also saw support from the lower Bollinger Band. In addition, the $46 level shows round-numbered support that dates back to when the same level acted as resistance in June.
Momentum, while on the decline, remains in positive territory, indicating that even a small amount of good news could begin building momentum again.
The short sellers have also been active on this stock, with more than nine times the average daily volume for Five Below shares tied up in bets against the stock going higher. A slight earnings beat will turn those short sellers into buyers, quickly propelling the shares back towards the high end of their range and above $100 on another breakaway to the upside.
Micron Technology, Inc. (MU)
DRAM chip company Micron has spent the last few months strengthening its technical picture as the stock has successfully transitioned into an intermediate-term bullish pattern. The pattern has been confirmed by the ascending 50-day moving average as well as this trendline’s cross above the longer 200-day moving average last month.
While the intermediate-term outlook is positive, the short-term perspective calls for a pullback as MU stock may have extended itself too far from its normal distribution range. This is evidenced by the price of Micron shares moving slightly above their top Bollinger Band, signaling that the potential for a regression to the mean has grown.
In addition to this, the longer-term 20-month moving is getting ready to apply some overhead pressure to the stock, as it is currently at the $18 mark and in a seriously accelerated decline thanks to the overhead pressure from this technically significant trendline.
Finally, MU stock suffers from a short-term overbought condition that is likely to put the sellers in charge of the next 5% move. A similar reading presented itself in early June ahead of an 8% decline in the price of the stock before the technical traders came in to buy at chart support at $12.
Watch for Micron shares to see some healthy technical selling after last week’s analyst upgrade. The stock should have support at the $14.25 and $14 levels, as this is where we are likely to see the technical buyers come back in to buy the shares on a value pullback.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
