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CHART ANALYSIS


DLTR Rally Under Threat?

08/11/10 11:38:14 AM
by Chaitali Mohile

The upward rally of Dollar Tree is almost exhausted. Will the ascending channel break downward?

Security:   DLTR
Position:   Hold

In 2009, Dollar Tree (DLTR) consolidated in a range of $34 to $29 for about six months. The black dotted lines in Figure 1 show the perfect horizontal consolidation of the stock. Similarly, the relative strength index (RSI) (14) was trapped in healthy bullish levels of 50 and 70. The average directional index (ADX) (14) indicated a developing uptrend by moving between 20/25 levels. The indicators suggested a bullish breakout of the consolidation range. During consolidation, the price movement is highly uncertain, and as a result, the volume in Figure 1 is shaky. The earlier advance rally of DLTR from $21.96 to $34.48 added the bullish sentiment to the consolidation, highlighting the possibility of the bullish breakout.

Accordingly, DLTR broke upward in March 2010. We can see in Figure 1 that the stock breached the upper range on stronger volume and moved up. Gradually, the fresh rally formed an ascending channel. The moving average convergence/divergence (MACD) (12,26,9) underwent a bullish crossover in positive territory itself, and the ADX(14) once again indicated the developing uptrend. The ascending channel pulled the ADX (14) above 30 levels with huge buying pressure. The RSI (14) turned overbought by moving above 70 levels. The channel moved higher and hit new highs at 45 levels. However, we can see that the lower trendline is now challenged. The two long bearish candles of June and July showed significant bearish strength that diluted the gains of past weeks. In July, the red candle covered the previous three bullish candles.

FIGURE 1: DLTR, WEEKLY. The lower trendline of the ascending channel is retested. The well-developed uptrend would protect DLTR by undergoing the bearish breakout
Graphic provided by: StockCharts.com.
 
The RSI (14) and the MACD (12,26,9) formed a lower high, developing a negative divergence for the bullish rally. This would have increased the bearish force on the rally. The bearish breakout would result in a huge trend reversal rally, which is currently not indicated on the charts. Since the uptrend is well developed, the ascending channel will probably not be breached downward. The negative divergence may generate volatility in the current rally. Traders can hold their long position till DLTR sustains the lower trendline support and keep a stop-loss at $38 to protect their trade.

Thus, the chart suggests slow price movement for DLTR.




Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company: Independent
Address: C1/3 Parth Indraprasth Towers. Vastrapur
Ahmedabad, Guj 380015
E-mail address: chaitalimohile@yahoo.co.in

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