Shares of Dollar Tree (NASDAQ:DLTR) have dropped more than 20% over the past few trading sessions as investors were less-than-pleased with the company’s latest earnings report and weak outlook. From a price action perspective in the near-term, however, DLTR stock is now getting markedly oversold and ripe for a tradable bounce.
Over the course of my 20 years as a trader and investor, I have found that blindly buying a dip or trying to ‘catch a falling knife’ does not sum up to a profitable strategy over time.
What I have observed, however, is that if a stock reaches certain stretched technical oversold readings (unless accounting irregularities or other legal problems abound), a so-called ‘mean reversion’ bounce becomes highly likely from a trading perspective.
To be clear, this ‘bounce trade’ strategy is not to try and bottom call anything, but rather is simply a tactical trading strategy.
DLTR Stock Charts
For some perspective, on the multiyear weekly chart we see that over the past decade DLTR stock has largely moved higher within a well-defined expanding range. This past October the stock reached its January 2018 highs but not quite the top end of the range.
The selling over the past couple of months has the stock at the low end of the big picture range once again, which also happens to coincide with the red 200-week simple moving average.
With the big picture chart in mind let us zoom into the daily time frames. Here we see that the sharp drop since the October highs now has the stock notably oversold in the short term as measured by the MACD momentum oscillator at the bottom of the chart.
While this alone is certainly no guarantee the stock will bounce here, it is noteworthy that this current level in the high $80s also coincides with the August lows in the stock. Additionally, my proprietary Vertical X indicator is currently also flashing the stock as severely oversold in the short-term, and thus overdue for a pause and potential bounce.
Active investors and traders could look to buy DLTR stock in the high $80s with a next upside target around $93.
The highest probability trade, however, that sets up well for this position in Dollar Tree stock is to sell an out-of-the-money put spread (options credit spread) in a very specific way. I am hosting a special webinar Friday, Nov. 6 to go over this setup in detail. Register here.
Special free webinar: How to generate stock market income with options credit spreads like a pro. Register HERE.
