On December 11 Dollar General Corp (DG) fell 7.80% on the back of news that the firm will cut prices, dragging with it lower the stock prices of rivals Dollar Tree Inc (DLTR) and Family Dollar Stores Inc (FDO).

From a technical point of view all three stocks currently offer juicy risk/reward for a long-side trade.  These stocks are bounce-worthy and even better so have defined risk (a clear stop) at the December 11th lows.  The clear stop levels, if breached could then also set the stocks up for a shorts-side try for nimble traders.

Out of the three stocks, my favorite candidate for a bounce is Dollar General Corp (DG), let’s look at the charts;

From a somewhat longer-term point of view, note the stock had solid support (green line) near $26.50 during the second half of 2010 and 2011, which ultimately lead to a breakout past a resistance line (red) in August 2011.  At this point the stock went on a 62% tear over the course over the next ten months until buyers simply couldn’t be found higher any longer in July 2012.

The stock has been sliding lower ever since, and currently is about 12% off its July lows.  The series of lower highs and lower lows since July has come as broader equity markets marched in the opposite direction as per the chart below; Dollar General Corp (DG) in blue, the S&P 500 in orange

The weakness over recent months in the stock price of Dollar General Corp (DG) has taken its price down to a 50% retracement level (support) of the entire rally that started in August 2011.  At the same time, especially after the sell-off on December 11th the stock was and remains oversold as per the stochastic oscillator, among other momentum indicators.

And very close-up the stock developed a so called piercing pattern, using official candlestick analysis terminology.  The big sell-off on December 11th produced a long red candle, which the next day was followed by a lower open and an intraday rally that led the stock to close more than 50% up the previous day’s red candle.  The logic behind this type of reversal pattern is that sellers got exhausted and were quickly overtaken by buyers on December 12th.  This should see follow-through buying over coming weeks, and as described earlier, should the stock drop below the lows of December 11th, any long position based on this setup can easily and without emotions be closed-out.

 

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