In recent days, Dollar Tree (DLTR) was hit with a rapid price markdown, not by a store manager but in the marketplace for its shares. Prices are down sharply from their zenith earlier this month, but the carnage is probably not over. The interesting thing is the technical indicators foreshadowed a possible turn.
In this daily chart of DLTR, above, we can certainly see what was a strong rise from the fourth quarter of 2015. Prices were above the rising 50-day moving average line and are still above the rising 200-day average. The On-Balance-Volume (OBV) line kept up with the price rise until early to the middle of this month and then it started to decline. A declining OBV line happens when the volume of shares traded is heavier on days when it closes lower than what is traded on up days. The tool has been around since the early 1960s and while it is a tad simplistic, it does work.In the days before the sharp gap to the downside, you can see the OBV line declining as traders and investors became aggressive sellers.
Another one of our favorite indicators in the momentum study. In the lower panel is the 12-day momentum indicator (today's price minus the price 12 days ago). Notice how during June, July and August as prices made higher and higher highs, the momentum study made lower highs. This is known as a bearish divergence -- momentum or acceleration slowing as prices move higher. Slowing momentum is a leading indicator and warns you that the rally is losing steam. Did we know the price reaction was going to be as sharp and as swift as it was? No, but maybe one should have considered lightening positions.
In this weekly chart of DLTR, above, we can see the $85-$75 area on the chart is likely to be a significant support area. It would not surprise me if DLTR traded down to the middle of this zone or around $80 before buying interest resurfaced. The rising 40-week moving average line is likely to be broken in the days ahead. The weekly OBV line has turned down and the MACD oscillator is generating a liquidate-longs sell signal. The chart looks like a "falling knife" so potential buyers should keep their powder dry and wait to see if buyers show up around $80.