While shares rallied impressively ahead of the results, it proved to be a fake-out ahead of a painful post-earnings correction.
Should investors buy the dip? I wouldn't have a problem with buying Dollar Tree stock on this pullback if it weren't for all the far more attractive candidates in the retail sector.
For instance, Best Buy (BBY) - Get Report and Burlington Stores (BURL) - Get Report were spiking on better-than-expected earnings on Tuesday. Target (TGT) - Get Report , Lowe's (LOW) - Get Report and Walmart (WMT) - Get Report all reported solid results too. I would feel more comfortable buying into strength and getting these names on pullbacks rather than getting long Dollar Tree stock on this earnings print.
Earnings of $1.08 a share missed expectations by 5 cents, while sales of $5.75 billion grew 3.8% year over year and eked past analysts' estimates. The sales and profit results weren't really the problem, as shares actually rallied in the premarket session on the headline results.
The midpoint of management's fourth-quarter revenue outlook came in below consensus expectations, while thee earnings outlook badly missed expectations. This is putting immense pressure on the share price on Tuesday.
Trading Dollar Tree Stock
News often drives price action and so the move for the latter is often impacted by the significance of the former. In other words, the more significant the news, the larger the stock price move can be -- in both directions.
On a post-earnings pullback, Dollar Tree stock would have been an attractive buy-the-dip candidate if it had held the $105.50 area. Not only did this area support the stock earlier this month, but it's also where the 200-day moving average comes into play.
Tuesday's gap sends DLTR stock below a number of channels, levels and key Fibonacci retracements.
Let's try to keep the setup simple: $95 was significant in March and May. After breaking below this level in early Tuesday trading, Dollar Tree stock recovered it. Conveniently, the 38.2% retracement comes into play near $95.
A close below $95 puts the $90 level on the table. Aside from marking the August lows, this level also has the 23.6% retracement nearby. Should DLTR stock reclaim and hold $95, look for it to rally back to $100. This level is psychologically important, while also having the 50% retracement nearby.
However, there it may run into the backside of prior channel support (blue line). Above $100 and prior channel support, and a move to the 200-day moving average is possible.
In short, below $95 puts $90 on the table. Below $90 and the December 2018 lows are possible. Above $95 and $100 is possible. Above $100 and the 200-day moving average could be in the cards.
This article is commentary by an independent contributor. At the time of publication, the author had no positions in the stocks mentioned.