Bull Run Ending for Dollar Stores

 | Dec 27, 2013 | 10:30 AM EST
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In the eight years following the 2007 economic crash, so-called dollar stores have attracted a great deal of investor interest. The newest kid on the block, Dollar General (DG), has never known anything other than the lime light, but forerunner Dollar Tree (DLTR) spent the better part of a decade hovering around the $10-per-share mark from the late 1990s into the new millennium before catching the savvy investors' eyes.

Stock valuations for both companies, as well as its competitor, Family Dollar (FDO), have since soared. Dollar Tree briefly tested the $60-per-share level just over a month ago, while Dollar General ran from $22 to over $61 since its 2009 initial public offering (IPO). Meanwhile, after trading as low as $14.62 in early 2008, Family Dollar climbed to just over $75 per share in September.

Several months ago, however, I began to wonder if the bull run in this niche retailer market had run its course. Now I'm convinced that it has.

Family Dollar was the first to succumb to market exhaustion. Between July and September, the stock began to experience a momentum shift on the daily and weekly time frames. This was quite similar to the exhaustion pattern it had displayed just over a year earlier when it peaked in the summer of 2012.

One of the unique characteristics of this momentum shift was that it consisted of three distinct and evenly spaced highs. In fact, this year's highs on Sept.19 came only one day after the 100% time expansion of the first two highs. In other words, the distance between the highs marked A and B on the daily chart (below) of Family Dollar is only one day less than the distance between the highs marked B and C. When this happens, a stronger pullback or correction is very common. It was one of the first things that caught my attention over the summer.


Family Dollar (FDO) -- Daily
Source: TradeStation


Family Dollar has continued to correct off the September highs with two waves of selling on the weekly time frame. The second wave of selling found support just over a week ago. While this leaves Family Dollar oversold in the short term, the monthly time frame still has a double top in play that will likely take at least another four to five months to sort out.

In the meantime, the stock is high on my list for swing trade action in both directions, because the monthly trend exhaustion is likely to continue to yield strong multi-week swings in the months ahead. This should remain true even if the overall monthly correction falls into a longer-term trading range and the security begins to correct more through time than price.


Dollar Tree (DLTR) -- Daily
Source: TradeStation


Dollar Tree was the second to fall. Its momentum shift began the day Family Dollar hit highs, but the progression of its momentum shift was quicker. Dollar Tree established its third high in just over a month and gave way to selling pressure after it announced that it saw its year-over-year profits slide from $0.68 a share to $0.58 a share in its latest quarterly earnings report. Dollar Tree has been trading in a low level range on the daily time frame ever since.

The current positioning suggests that a secondary breakdown could easily be in the works. I have a target of $52 over the next month on this one, but am waiting for a stronger intraday reversal trigger on the 60-minute time frame to initiate a short. A head and shoulders strategy is one example of a pattern to watch for.


Dollar General (DG) -- Daily
Source: TradeStation


So far, Dollar General has bucked the trend that we've been seeing develop in these discount retailers. After beating third-quarter earnings estimates on Dec. 5, the stock struck a new all-time high just this week. Nevertheless, this recent high is only slightly higher than the high it hit in the immediate aftermath of the news. In fact, it has created a double-top on the daily time frame.

After a nice start earlier this year, shares of Dollar General have been struggling to regain upside momentum throughout the past two quarters -- despite strong earnings. The company had experienced a setback in the second half of 2012 and spent the past year recovering. After breaking through the 2012 highs, however, the weekly trend became very choppy. This has slowed the momentum of the overall uptrend and makes Dollar General susceptible to rapid price retracements.

Despite its relative strength compared to Family Dollar and Dollar Tree, $62 is likely to continue to serve as a strong daily resistance zone in the stock. I have a downside target of $57 on Dollar General over the next two months and will be monitoring the intraday time frames for reversals as early as next week. A third high on the daily time frame, however, would be even more ideal for shorting.

My objectives on all three of these retailers will be to focus on the swing trading time frame with a holding period averaging one to four weeks. However, all three are currently vulnerable on the weekly and monthly charts for larger corrections through price and time.



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