Trading Blueprint for Dollar Tree (DLTR) Stock

Discount retailer Dollar Tree (NASDAQ: DLTR) shares are still reeling from its Q3 2019 earnings fallout. To add insult to injury, TRC Capital Investment Corp made an unsolicited offer to tender 1.5 million shares at $89.88-per share, (-3%) discount to the closing price on Dec. 27, 2019. Having merged with Family Dollar, this popular chain of stores offer food, merchandise and household products mostly priced at $1.00. Sentiment took a nasty hit when competitor Five Below (NASDAQ: FIVE) missed Q4 2019 estimates and lowered guidance on their Jan. 13, 2020 earnings release gapping shares down (-17.51%). The recent plunge in the S&P 500 (NYSEARCA: SPY) benchmark index has caused a major reversal in overall market sentiment from the spread of coronavirus and its disruption of global supply chains. Analysts at Cleveland Research lowered sales estimates below consensus on Feb. 14, 2020. The upcoming Q4 2019 earnings will determine if DLTR can stage a reversal in sentiment and share prices.

Earnings Catalyst

DLTR reports Q4 2019 earnings pre-market on Weds. March 4, 2020, followed by the 9:00am EST conference call. Consensus analyst estimates are for 1.75-EPS profit on revenues of $6.39 billion. Investors are braced for weak holidays sales and forward guidance cuts from disrupted global supply chains stemming from the coronavirus epidemic stalling factories and manufacturers. In light of the market sell-off, the bar is set low heading into earnings results. Updates on the performance of the Dollar Tree Plus line being tested in 115 stores, where multi-price assortment of products priced at $2, $3, $4 and $5 could be a positive catalyst improving the narrative moving forward. The higher price points carry higher margins and appeal to a broader demographic of customers. It also attracts “treasure hunters”, individual retail customers seeking bargain hauls on a weekly basis looking to score items for personal use or resale. While treasure hunters are usually attracted to retailers like TJX and ROSS, DLTR could make headways into this niche as incremental dollar denomination pricing rises.

Rifle Chart Technical Analysis Trajectories: Longer-Term

We use the rifle charts on wider time frames to lay out the playing field suitable for swing traders and investors. The DLTR monthly stochastic is making a full oscillation down towards the 20-band oversold level. The 78.68 Fibonacci (fib) level has been a multi-year support going back to July 2017. The weekly stochastic bottomed out trying to coil under the 20-band versus the 5 and 15-period MA at 87.46 and 90.15, respectively. The lower BBs on the weekly rifle chart sit at 70.41. The bearish daily stochastic full oscillation down has also reached the 20-band as it tested the daily lower BBs at 81.74 with a potential MSL heading into earnings. This pivotal release may set-up the next leg of the breakdown or being a positive catalyst to finally turn the wider time frame stochastic back up.

Sympathy Stocks:

DLTR has a positive correlation with direct dollar-denominated discount retailers including Dollar General (NYSE: DG)and Five Below (NASDAQ: FIVE). Further sympathy with discount retailers include TJX Companies (NYSE: TJX) and Ross Stores (NASDAQ: ROST) if DLTR makes a large gap and the momentum follow-through that resonates with peers.

Trading Game Plan for Earnings Gap:

This information is accommodative to intraday and short-term traders looking to play the earnings gap.   With a pre-market earnings release immediately followed by the conference call at 9:00am EST. Only the nimblest traders should even consider hitting the immediate reaction on the pre-market release. If DLTR gaps down over 10-percent on the initial reaction, a reversion bounce could set-up heading into the 9:00am EST conference call. Nimble pre-market traders can scalp the price gap reversion levels, but most should wait for the morning session off the opening bell. Traders can expect scalps ranging from 0.25 to 1.50 in the first 20-minutes as ranges and spreads eventually contract.  Reversion scalps off the key price inflections levels can be played for the second gap reaction then shift focus to the third reaction trend move.

The gap price reversion levels for the upside price gaps are: 89.60 super fib/weekly 15-pd MA, 92.50 sticky 2.50s zone, 94.14 fib/sticky 5s zone and 98.85 fib. Downside gap reversion price levels are: 78.68 multi-year fib support, 75.97 fib, 72.89 fib and 69.04 fib. If DLTR forms a greater than 10-percent gap up or down, then consider trading sympathy action on DG, FIVE and potentially TJX and ROST.