Discount retailer Dollar General Corp (DG) is trading sharply lower in Thursday’s pre market after missing third quarter estimates and lowering fiscal year 2017 guidance. Comparative same store sales fell more than expected, with the company blaming lower grocery prices and food stamp reclassifications for the shortfall. It also admitted aggressive competition, with customers finding better deals at rivals and on the Internet. Its earnings statement seemed to ignore the online component, calling the quarter’s negative factors “macroeconomic and transitory in nature”
The company owns and operates 13,000 stores in 43 states, making it one of the largest discount retailers in the world. A $22-billion market cap reflects deep penetration into low and middle class neighborhoods, where it competes with Wal-Mart Stores Inc (WMT) and Dollar Tree Inc (DLTR). Not surprisingly, rivals have also reported limp growth metrics, with a strong U.S. economy and Net migration encouraging customers to shop around.
DG Long-Term Chart (2009 – 2016)
The company went public at $22 in November 2009 and ground sideways into a March 2010 breakout that stalled at $30 a few months later. The subsequent trading range stalled progress for more than a year, and the price was caught between the mid-$20s and mid-$30s. It finally cleared resistance in the fourth quarter of 2011, entering a multiyear uptrend interspersed by intermediate corrections that have tracked a 5-year trendline.
The trend advance ground out a long series of new highs between 2013 and 2016 while the long-term price structure has held a string of higher highs and higher lows since last decade’s public offering. While this denotes strong institutional sponsorship, the technical tone has deteriorated since July’s all-time high at $96.88, with the long-term uptrend getting tested severely.
The monthly Stochastics oscillator has dropped to the deeply oversold level while the weekly has hit the overbought level, generating a post earnings conflict that favors a modest bounce after testing at the blue trendline and 200-week EMA in the upper $60s. The stock was trading near $71.50, or just three points above that critical price level in early Thursday action. The November test adds a bearish note to the current scenario because the subsequent bounce failed to post a higher high, unlike 2011, 2013 and 2015 tests.
DG Short-Term Chart (2014 – 2016)
The rally paused in the low $80s in July 2015, giving way to a multi-month pullback that tested the trendline 4-months later. It returned to resistance in March 2016 and broke out, completing an Elliott 5-wave advance into the edge of triple digits. The stock gapped down on heavy volume just four weeks after hitting that peak, failing the breakout while establishing a strong resistance layer that ended the November recovery attempt.
On Balance Volume (OBV) plunged into October, dropping to the lowest low in more than two years even though price held within 2015 to 2016 range boundaries. This signals a bearish divergence, raising odds the trendline will eventually break and trigger a secular downtrend. We’ll get a better read on those odds in coming sessions, with new sell signals going off when the indicator undercuts the prior low.
The lower high posted into earnings may add momentum to the current decline so don’t try to catch a falling knife at the trendline. Instead, wait for a basing pattern lasting a minimum of one to two weeks before taking long exposure, similar to the November rebound. Conversely, a trendline break will signal the end of the long uptrend, favoring short sales that may profit from a continued decline into the low $50s.
The Bottom Line
Dollar General is testing a multiyear trendline for the second time in the fourth quarter after a poorly received earnings report. Deeply oversold monthly relative strength readings should underpin the stock for several weeks or months, delaying a breakdown. However, downside momentum is growing, raising odds the long uptrend will eventually come to an end.
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