Dollar General Corp.'s (DG) fourth-quarter earnings report on March 16 should confirm contracting margins in an adverse retail environment that’s undermined brick and mortar sales at other discount and variety stores, including Target Corp. (TGT) and Wal-Mart Stores Inc. (WMT). And, like those larger operations, a successful transition into e-commerce sales may be insufficient to recoup losses incurred in the company’s more traditional storefronts.

Rival Dollar Tree Inc. (DLTR) met earnings expectations in its March 1 report but guided fiscal year 2018 EPS below consensus, reflecting tight margins and comparative sales in low single digits. Both retailers now face the added challenge of a presidential administration that could order tariffs or border adjustment taxes on Mexico and China, substantially raising the costs of doing business in their vulnerable low and lower middle income demographic.

DG Weekly Chart (2009–2017)

DG

The company came public at $22 in November 2009 and fell into a trading range with support at $21 and resistance at $25. It broke out in 2010 and entered a persistent uptrend that eased quickly into a rising wedge (expanding highs) on the arithmetic chart and a rising channel (proportional highs) on the logarithmic chart. Buyers remained in firm control into July 2016 when the rally topped out at an all-time high near $97.

The stock plunged in August 2016 after a weak earnings report, dropping more than 17% in a single session while generating strong resistance between $75 and $90. The decline finally settled on channel support in October, yielding three tests at that level into March 2017 while generating a dangerous scenario that could trigger a breakdown if the upcoming report yields a sell-the-news reaction.

On Balance Volume (OBV) peaked at the start of 2015, more than seven months ahead of price, and turned lower into the fourth quarter. An accumulation phase into the summer of 2016 came up short, posting a lower high ahead of a steep decline that signaled an aggressive exit by funds and institutions. This loss of sponsorship could presage a breakdown through the four-year trendline and start a secular downtrend.

DLTR Weekly Chart (2007-2017)

DLTR

The stock escaped major damage during the 2008 economic collapse and returned to the 2007 high at $15.32 in May 2009. It broke out into the new decade, lifting in a strong uptrend that dropped into a rising channel in 2012. Price action matched its rival in the next three years, with the channel expanding into a rising wedge that reached an all-time high at $99.92 in August 2016.

It then fell 10% in sympathy with DG, ahead of continued downside that eased in November when the stock approached 4-year trendline support in the lower-70s. A recovery wave into December stalled at the 50% selloff retracement, ahead of weak price action that’s now engaged in a third test at support. Given tight correlation between retailers, weak DG results this week easily trigger a DLTR breakdown.

However, a much stronger OBV pattern could save the day, posting a series of new highs starting in early 2015 and continuing into the fourth quarter of 2016 when the price fell into channel support. That resilience signals a strongly bullish divergence that indicates much healthier institutional buying interest than its rival, despite nearly identical price patterns. At the least, it tells us to avoid short sale positions, even if price breaks support.

The Bottom Line

Dollar General Corp. (DG) and Dollar Tree Inc. (DLTR) have carved nearly identical price patterns, reflecting their unique retail niche, while DLTR has attracted a stronger institutional crowd. This sponsorship tells observant market players it should offer stronger returns if bulls return after this week’s earnings report. Conversely, the relatively weaker DG should provide a better short sale opportunity if quarterly results trigger breakdowns.

<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>

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