Discount retailers Dollar Tree, Inc. (DLTR) and Dollar General Corporation (DG) are trading higher on Thursday, attracting strong buying interest despite a mixed bag of quarterly metrics. Dollar Tree missed second quarter profit estimates and reduced fiscal year 2020 guidance, prompting an initial sell-off that got bought in a 5% uptick. Dollar General fired on all cylinders at the same time, beating estimates and raising 2020 guidance, prompting pre-market gains that have stretched about 8%.

Both companies issued disclaimers to profit and revenue guidance, stating that results don't "contemplate or include the impact of tariffs greater than those already in place," repeating an industry mantra that has become ubiquitous during second quarter earnings season. This approach reflects a corporate legal decision rather than political bias, with counsel advising companies how to get around tariff-induced shortfalls in coming quarters.

Chart showing the share price performance of Dollar General Corporation (DG)

Dollar General came public at $22.00 in November 2009 and settled into a trading range that broke to the upside in 2010. The uptrend paused in the mid-$50s in 2012, generating a pullback into the upper $30s that carved the endpoints for a rising channel that guided price action into the 2016 high in the upper $90s. The stock then rolled into a more aggressive decline, finding support in the upper $60s just before the presidential election.

A sell-off into June 2017 tested the prior low successfully, completing a double bottom reversal that attracted healthy buying interest and a recovery wave that reached the 2016 high in January 2018. It paused at that level into the second half of the year, carving the handle of a cup and handle pattern that generated an August breakout. The stock has performed well since that time, carving a series of new high into the mid-$140s.

The retailer's shares surged above $150 in reaction to the news, which will mark an all-time high after the opening bell. Unfortunately, the opening rally will also set off short-term overbought readings that are likely to limit upside for several weeks at a minimum. The $145 to $150 price zone could act as a balance point in this bilateral price structure, with declines that partially or completely fill the opening gap offering low-risk buying opportunities.

Chart showing the share price performance of Dollar Tree, Inc. (DLTR) 

Dollar Tree stock has traversed more dangerous ground than its rival for most of this decade, breaking out above the 2000 high at $16.08 in 2010 and entering a healthy uptrend that stalled in the mid-$80s in the first quarter of 2015. It pulled back to test breakout support near $60 in the fourth quarter and turned higher, returning to the prior peak in May 2016. A summer breakout failed in September, dumping the stock within five points of the prior low in June 2017.

The stock broke out once again in December but suffered an identical failure in March 2018, giving up three years of upside when it violated the 2015 high in June and fell to $80. It carved a basing pattern near that level into year end and turned higher, nearly completing the third 100% sell-off retracement since 2016. Aggressive sellers have taken control since the June peak, giving up two-thirds of the 2019 gains.

The pre-market uptick has lifted the retailer within 10 points of the June peak, well below resistance that stretches between $113 and $116. The on-balance volume (OBV) accumulation-distribution indicator looks constructive for bulls, posting an all-time high in April and holding relatively close to that level despite the summer swoon. This bodes well for higher prices, but a sustained breakout will take time, especially with a four-year history of technical failures.

The Bottom Line

Deep discount retailers Dollar Tree and Dollar General are trading higher in lockstep, despite markedly different second quarter earnings results.

Disclosure: The author held no positions in aforementioned securities at the time of publication.