Discount retail store operator Dollar General Corp (DG) reported its latest earnings yesterday May 4th. Courtesy of a weak report across the board the stock closed 9% lower on the day, taking many of its competitors with it lower as well; Family Dollar Stores lost 2% and Dollar Tree Inc (DLTR) lost 1%.
They say the reaction to the news is more important than the news itself. I find this holds especially true when using technical analysis. While Tuesday’s sell-off in the stock broke the near-term chart, the long-term chart also took a good punch.
Although the multi-year simple up-trend line in Dollar General Corp (DG) remains intact, the stock did develop a notable double top with its tops in July 2012 and just recently in May. In fact, if we look closely enough, the May high served as a bearish lower high versus the July 2012 highs. From where I sit this isn’t necessarily the sign of any major demise for the stock, but it could lead the stock to increase its attraction toward the multi-year up-trend line which currently comes in near the $46 area.
On the daily chart Tuesday’s breakaway gap is better visible. The day’s sell-off left an airpocked above it, some of which may need to be filled before the stock can continue a move lower. Furthermore, Tuesday’s breakdown in the stock came to a halt right at its 200 day simple moving average. As each stock has its own personality, they each react differently to their various moving averages. In the case of Dollar General Corp (DG), the stock has shown very little respect for its 200 day moving average, which leads me to assign little importance to Tuesday’s lows as it relates to an area of support. The sell-off also only resulted in the stock retracing a little more than 38.20% of its year to date rally. Given the steepness of the one-day sell-off I think it should stand a good chance of retracing 50% – 61.80% of the 2013 rally, which would get the stock closer to the $46 area and thus toward the aforementioned multi-year up-trend. In such case, whether or not the stock will eventually hold the multi-year uptrend is in my eyes simply too early to tell.