Dollar Tree (NASDAQ:DLTR) stock is rallying on Monday, up over 3% as investors are apparently optimistic ahead of the company’s third-quarter results. Currently near $112.50, investors are wondering if Dollar Tree stock can break to new highs over $119.71. If shares pull back, where will support come into play?
Monday’s action is going to cause many investors — longs and shorts — to hold their breath a bit. On the one hand, before Monday’s 3%-plus rally, DLTR stock was struggling.
Shown in the chart below, shares were trapped under downtrend resistance (purple line) and were struggling to find support from the 100-day moving average. The momentum-measuring MACD indicator (blue circle) wasn’t suggesting that bulls’ had a lot of control, either. On the plus side, though, Dollar Tree stock was holding up above the 200-day moving average.
Let’s take a closer look at the charts.
Trading Dollar Tree Stock
All of these factors are being jumbled ahead of earnings. The pre-earnings rally in Dollar Tree stock sent shares well over downtrend resistance and is flipping the MACD indicator into bulls’ favor. Now shares are flirting with the 50-day moving average.
All of this may convince bulls to take a long position ahead of earnings. I’m not saying that won’t work, but in my experience, trading earnings is simply a dice roll because we don’t know the results. Heck, even if we knew the results ahead of time, the reaction isn’t always what we’d expect.
That’s why I like to see the first day of post-earnings action to make my decision — long or short.
On the long side, bulls need to see Dollar Tree stock hold their ground. In other words, a muted to slightly higher reaction is just fine. But it would be most ideal for DLTR stock to hold the $111.50 to $113 area. The former marks the 78.6% retracement for the one-year range. Over the latter would put DLTR stock over the 50-day moving average as well.
Over $118 and the $119.71 high is on the table.
On the downside, the shallower the dip, the better. $106 is an important level of support to hold, considering two pullbacks this month were gobbled up from investors at this area. Further, with the 200-day moving average at $105.62, this would be a discouraging area for bulls to lose.
The bottom line: Over the 50-day moving average is good for bulls, as DLTR stock holds Monday’s gains and adds to them. Over $118 and new highs are possible. A 2% to 3% pullback and the bulls are still okay. Below the 200-day warrants caution.
Dollar Tree Earnings Expectations
Some retailers continue to do really well, while others continue to struggle mightily. For example, stores like Macy’s (NYSE:M) and Kohl’s (NYSE:KSS) have done poorly. Others like Target (NYSE:TGT) stock reported solid numbers and traded well. Walmart (NYSE:WMT) had good results, but failed to hold its new highs.
I am looking for decent results out of Dollar Tree stock, and out of Dollar General (NYSE:DG) in early December. Even as the economy hums along, low-cost retailers are still finding demand from consumers.
Last quarter, DLTR rallied on better-than-expected earnings, revenue, and comp-store sales expectations. It wasn’t a big beat on the top and bottom lines, but management foresaw enough strength to give a boost to its full-year earnings and revenue outlook.
Despite that fact, estimates for this quarter have actually decreased over the past 90 days. Analysts expect Dollar Tree stock to earn $1.13 per share this quarter vs. expectations for $1.14 per share three months ago. Granted, this is just a penny difference, but one would have thought estimates would have increased, not decreased since the last quarter.
On the revenue front, estimates call for sales of $5.74 billion, representing growth of about 3.6%.
While one could make a case against Dollar Tree stock — 22 times earnings and negative year-over-year earnings growth, for example — the stock and the business do seem to have some momentum.
Let’s see if the results are good enough to push DLTR stock higher. At the very least, let’s see if support can buoy the name on potential pullback. Below the 200-day and sub-$100 could be on the way, with bears snagging control of momentum in the process.