Dollar General (DG) lost more than a couple of dollars Tuesday and has put bulls in a tough position. After a rough August, DG spent September in consolidation mode before finally breaking down again. Then yesterday, we saw yet another breakdown. While several stocks have already tested this Aug. 24 lows, many are still well above the morning blip we saw that day. DG, on the other hand, is nearly 10% below the lows of Aug. 24.
Even as the stock bounced last week, we saw a bearish crossover in the MACD, a deterioration in the Ultimate Index, wider Bollinger Bands and the Force Index only made a small dent in its very bearish reading. So, we have trend, momentum, volatility, volume and price all working to push DG lower. The only possible positive here is higher lows in a few indicators against September lows. Unfortunately, those indicators are still in decline, so we can't call these bullish divergences yet. The current price target I'm working with here is $61. I would say the stock closing above the 10-day simple moving average (SMA) would create a more neutral pattern and a close over $69 would be somewhat constructive for bulls.
The weekly chart is the real trouble spot. The last two weeks have been brutal. Last week's close triggered a bearish head-and-shoulders pattern that now measures to around $61. The measured move is the distance from the head to the neck shown by the dotted black area. Secondary indicators have fallen through the floor with the Relative Strength Index (RSI) crossing into oversold territory and the Vortex Indicator skyrocketing for the bears. Based on the Ease of Movement (EMV), the stock is declining with ease. Bulls are putting up little fight. Furthermore, the sharp nature of the decline in the EMV indicates a higher probability of a continued downside move.
Overall, both the daily and weekly charts for DG point toward a test of $61, with $60 a very realistic expectation.
I figure Doug Kass is now so "beared up," I'd toss in a second bearish chart of the day. I have a few bullish charts, so keep an eye out in Columnist Conversations if you want a few charts with upside potential, but I'm bringing in the dough, literally.
Papa John's (PZZA) looks to continue the trend of pizza joints struggling to get anything done to the upside. The stock attempted to breakout yesterday, but reversed hard and fell through support. These types of reversals are significant if they can see just a little follow-through, which is what I'll be watching for today. Not only did price lose support, but so did several secondary indicators. Momentum broke down as the Relative Strength Index (RSI) fell below 50 and trend did the same as the Ultimate Index produced a similar move to the RSI.
The Force Index also made its way into the bears favor. With the stock trading under both the 10-day simple moving average (SMA) and the 50-day SMA, it is priced to retest that Aug. 24 low. If yesterday was truly meaningful, shares should head all the way to $60 with a quick stop at $64.
The weekly chart is very similar to what we saw earlier with Dollar General. The difference is PZZA has not yet triggered the head-and-shoulders pattern. If it does, then we're looking at an attractive downside of $10 based on the current measured move. The Ease of Movement (EMV) reflects the potential for a sizeable bearish move lower. While this measure is below zero, the bears have the advantage. Furthermore, given the new low in the EMV, I would expect it sometime before the stock could even put together a sizeable bounce. RSI has dropped to a new low for the past year even though the stock is $27 higher than the last time it was at these RSI levels. This is a sizeable bearish divergence and really has my attention. Finally, the Vortex Indicator just ties it all together as trend favors a breakdown.
Overall, I favor waiting for a trigger, but I'm tempted to look at put spreads if I decide to make a move intra-week.