Dollar General DG beat earnings-per-share estimates for the third consecutive quarter before the open on Dec. 5.
Even as the Goodlettsville, Tenn., discount retailer raised guidance for full-year earnings, the stock opened below its quarterly risky level at $157.81.
When the stock set its all-time intraday high of $166.98 on Oct. 23, that day was a negative key reversal, where the close of $162.98 was below the Oct. 22 low of $164.39. This was a warning to sell strength on the stock.
This makes my call to sell shares of Dollar General on strength to its quarterly risky level at $157.81.
Another technical concern was that the stock ended November with a negative weekly chart, defined by the weekly close below its five-week modified moving average at $158.53 with its 12x3x3 weekly slow stochastic reading falling below the overbought threshold of 80.
Most important, when the stock set its high, this reading was above 90, defining an inflating parabolic bubble. The bubble is popping since then with a decline of 8%.
The stock closed Wednesday at $153.55, up 42% year to date and in bull-market territory 57% above its Dec. 24 low of $98.08.
The stock is not cheap, as its p/e multiple is almost 24.5 with a dividend yield of 0.83%, according to Macrotrends.
This profile indicates that investors should lock in long-term gains now.
The Daily Chart for Dollar General
The double line at $118.27 and $118.53 is the second-half semiannual value level at $118.27 and the annual value level at $118.52.
When 2019 began, $118.52 was a risky level, first tested on Feb. 13. This level was a magnet until May 29, when it became a value level at which to buy the stock on weakness.
Fast forward to the end of the third quarter: The higher horizontal line is the quarterly pivot for the fourth quarter at $157.81. This key level has been a magnet since Oct. 1 and is now a risky level following the key reversal on Oct. 23. This level is now a risky level at which to sell on strength.
The Weekly Chart for Dollar General
The weekly chart for Dollar General is negative, with the stock below its five-week modified moving average of $157.89. The stock is well above its 200-week simple moving average, or reversion to the mean, at $98.48.
This key moving average provided a buying opportunity January 2017 and July 2017 as it was rising to $70.18.
The 12x3x3 weekly slow stochastic reading is projected to decline to 58.28 this week from 69.51 on Nov. 29. During the week of Oct. 25, when the stock set its high, this reading was 91.57, above the 90 threshold as an inflating parabolic bubble, which is a signal to book profits.
Trading Strategy: Buy weakness to the 200-day simple moving average at $139.01 and reduce holdings on strength to its quarterly risky level at $157.81.
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 monthly, quarterly and semiannual levels. 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 Sept. 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 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 its time horizon expires.
How to use 12x3x3 Weekly Slow Stochastic Readings:
My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing 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, so I call that an “inflating parabolic bubble” as a bubble always pops. I also call a reading below 10 as being “too cheap to ignore.”