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Dollar Tree Heading Lower After Analyst Downgrade

Following six weeks of bullish signals, my indicators have started to shift and are now giving bearish-to-neutral readings, and today, I am recommending a bearish trade on Dollar Tree, Inc. (NASDAQ:DLTR).

After such a strong run in the market — the S&P 500 is up about 16.5% in price since the October 2019 low — I’m taking the shift in my indicators as a sign that it’s time to get more defensive.

DLTR received an analyst downgrade this week, and there are also some broad concerns developing around the coronavirus in China that could affect the company.

DLTR is starting to head lower, and traders looking to profit during a potential pullback could do so with a cheap put option on the stock.

Potential Disruptions in China

As mentioned above, we now have a new black swan risk facing the market — coronavirus. A coronavirus causes a kind of pneumonia, and the outbreak of this particular virus was first reported in December.

The virus is causing a stir because it is from the same family as severe acute respiratory syndrome (SARS), which killed nearly 800 people around the world in the early 2000s.

The SARS crisis led to economic difficulties in Asia, and the new virus could have a similar effect.

Based on the latest reports, 26 people have died from the virus in China, with an additional 830 cases confirmed. Cases have also been reported in Japan, South Korea, Vietnam, Thailand, Taiwan, Singapore and even the United States.

Investors seem relatively unconcerned for now, but if we start to see the virus spread to more and more major cities, investors may look to invest in companies with less exposure to China than DLTR.

Heading Down After a Big Gap Lower

DLTR struggled heading into the holiday season. In November, the stock dropped by over 17% because it had a mixed earnings report.

Traders were also still concerned about the developing trade deal between the U.S. and China in December, though DLTR has been relatively capable of navigating tariff concerns. That may be why the recent signing of the first phase of the deal didn’t send investors back into the stock.

If you look at the chart below, you can see the stock has started to form a downward channel. Fellow discount retailer Five Below, Inc. (NASDAQ:FIVE) announced its holiday sales were disappointing, and that may have put investors off the entire sector.

Daily Chart of Dollar Tree, Inc. (DLTR) — Chart Source: TradingView

The stock fell this week because of an analyst downgrade from Bank of America (NYSE:BAC). There are ongoing leadership changes in the Family Dollar segment of DLTR that is worrying investors.

The fundamental and technical pictures don’t look promising in the short term, and if it breaks below support at the $87 level, there isn’t much stopping it from heading toward its next support level at around $82.

Buy to open the Dollar Tree, Inc. (DLTR) March 20th $80 Puts (DLTR200320P00080000) at $1.50 or lower.

InvestorPlace advisor Ken Trester also brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.

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