Dollar Tree, Inc. (DLTR) reported a huge earnings miss when it released quarterly results before the open on Nov. 26. The stock closed at $112.39 on Nov. 25 and then gapped lower at the Nov. 26 open at $95 76 for a price gap of nearly 15%. The stock tested its quarterly risky level at $113.14 on Nov. 25 ahead of earnings and then gapped below its semiannual value level at $102.34.
Investors who follow the charts were able to sell the stock before shares crashed. The weekly chart also provided a warning with a negative profile. The stock traded below its "reversion to the mean" or 200-week simple moving average at $90.58 and then ended last week above this key level.
Dollar Tree missed earnings per share (EPS) estimates by a nickel, and its guidance was disappointing. Investors looking to catch this falling knife could have done so at its "reversion to the mean" at $90.58. The stock closed last week at $92.24, up 2.1% year to date and up 12.9% from its low of $81.71 posted on Dec. 10, 2018. Shares set an all-time intraday high of $119.71 on Oct. 22 and ended last week in bear market territory down 22.9%. This is not a surprise, as the stock showed an "inflating parabolic bubble" formation on its weekly chart at the high.
The daily chart for Dollar Tree
The daily chart for Dollar Tree shows a stock with extreme volatility in 2019. The stock closed 2018 at $90.32, which was a key input to my proprietary analytics. The annual risky level at $116.69 was not tested until Oct. 16 and was a level at which to book profits. The close of $107.39 on June 28 was another important input. The second half 2019 semiannual pivot was a magnet between July 30 and Sep. 4, and then came the price gap below it following the Nov. 26 earnings report.
The close of $114.16 on Sep. 30 was another input to my analytics, and Dollar Tree's fourth quarterly pivot is $113.14. This level was a magnet between Oct. 1 and Nov. 25, when it was a risky level ahead of earnings. The close of $91.46 on Nov. 29 was another input that resulted in monthly and weekly risky levels at $101.85 and $99.75.
The weekly chart for Dollar Tree
The weekly chart for Dollar Tree is negative, with the stock below its five-week modified moving average of $103.95. The stock traded below its 200-week simple moving average, or "reversion to the mean," at $90.58 last week and then ended the week above it. The 12 x 3 x 3 weekly slow stochastic reading ended last week declining to 45.51, down from 58.30 on Nov. 29. At the Oct. 22 high, this reading was above 90.00 as an "inflating parabolic bubble," which preceded the 22.9% decline.
Trading strategy: Buy Dollar Tree shares on weakness to the 200-week simple moving average at $90.58 and reduce holdings on strength to the monthly, semiannual, quarterly, and annual risky levels at $101.25, $102.34, $113.14, and $116.69, respectively.
How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31, 2018. The original annual level remains in play. The close at the end of June 2019 established new semiannual levels, and the semiannual level for the second half of 2019 remains in play. The quarterly level changes after the end of each quarter, so the close on Sep. 30 established the level for the fourth quarter. The close on Nov. 29 established the monthly level for December.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.
How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.