Dollar Tree, Inc. (DLTR) reported better-than-expected earnings on May 28. The stock popped to $99.02 that day and then dropped to as low as $91.81 on June 8.
The stock closed Monday, June 8, at $93.73, down just 0.3% year to date and in bear market territory at 21.7% below its Oct. 22 high of $119.71. Dollar Tree stock is also in bull market territory at 55.7% above its March 28 low of $60.20.
The daily chart for Dollar Tree
A year ago, shares of Dollar Tree were above a golden cross, with the 50-day simple moving average above the 200-day simple moving average. This positive setup tracked the stock to its Oct. 22 high of $119.71.
The stock gapped lower on Nov. 26 on missed earnings. A death cross formed on Dec. 23, when the 50-day simple moving average fell below the 200-day simple moving average to indicate that lower prices would follow. This sell signal tracked the stock to its March 28 low of $60.20.
As 2020 began, the stock was below its semiannual risky level at $104.88. On the rebound, the stock returned to the 50-day simple moving average on April 16. Dollar Tree gapped above its quarterly pivot at $88.31 and its 200-day simple moving average on the positive reaction to earnings released on May 28. The 200-day simple moving average remains a magnet at $93.48.
The weekly chart for Dollar Tree
The weekly chart for Dollar Tree is positive, with the stock above its five-week modified moving average of $86.30. The stock moved above its 200-week simple moving average, or reversion to the mean, at $90.45 during the week of May 29.
The 12 x 3 x 3 weekly slow stochastic reading is projected to rise to 73.26 this week, up from 66.92 on June 5. At the Oct. 22 high, this reading was above 90.00, putting the stock in an inflating parabolic bubble formation. This bubble popped. During the week of Feb. 7, this reading was below 20.00, putting the stock in a category called too cheap to ignore. This led to the strength above its 200-week simple moving average.
Trading strategy: Buy Dollar Tree stock on weakness to its quarterly value level at $88.31. Reduce holdings on strength to the semiannual and annual risky levels at $104.88 and $115.67, $116.69, respectively.
How to use my value levels and risky levels: The stock's closing price on Dec. 31, 2019, was an input to my proprietary analytics. Semiannual and annual levels remain on the charts. Each calculation uses the last nine closes in these time horizons.
The second quarter 2020 level was established based upon the March 31 close, and the monthly level for June was established based upon the May 29 close. New weekly levels are calculated after the end of each week, while new quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year, and annual levels are in play all year long.
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 the 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. A reading above 90.00 is considered an "inflating parabolic bubble" formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered "too cheap to ignore," which is typically followed by gains of 10% to 20% over the next three to five months.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.