Options Trade – Dollar General Corporation (DG)
Monday, December 24, 2012

Dollar General Ready To Bounce!

**OPTION TRADE: Buy the DG May 2013 46.000 call (DG130518C00046000) at or under $1.75, good for the day. Place a protective stop limit at $0.80 and a pre-determined sell at $3.00.

by Ian Harvey

December 24, 2012

Introduction

On Dec. 11, Dollar General (NYSE:DG) fell 7.8% on the back of news that the dollar store will cut prices, dragging the stock prices of rivals Dollar Tree (NASDAQ:DLTR) and Family Dollar (NYSE:FDO) right along with it.

From a technical point of view, all three stocks currently offer juicy risk/reward for a long-side trade. These stocks are bounce-worthy, and better yet, have defined risk (a clear stop) at the Dec. 11 lows. The clear stop levels, if breached, could then also set the stocks up for a short-side try for nimble traders.

The Facts

Out of the three stocks, the favorite candidate for a bounce is Dollar General. Let’s look at the facts:

1. From a somewhat longer-term point of view, note that DG had solid support near $26.50 during the second half of 2010 and 2011, which ultimately led to a breakout past a resistance line in August 2011. At this point, the stock went on a 62% tear over the course of the next 10 months until buyers simply couldn’t be found higher any longer in July 2012.

2. DG has been sliding lower ever since, and currently is about 12% off its July lows. The series of lower highs and lower lows since July has come as broader equity markets marched in the opposite direction, such as the S&P 500.

3. The weakness over recent months in the stock price of Dollar General has taken its price down to a 50% retracement level (support) of the entire rally that started in August 2011. At the same time, especially after the selloff on Dec. 11, the stock was and remains oversold as per the stochastic oscillator, among other momentum indicators.

4. And very close-up, the stock developed a so-called piercing pattern. The big Dec. 11 selloff produced a long, red candle, which the next day was followed by a lower open and an intraday rally that led the stock to close more than 50% up the previous day’s red candle. The logic behind this type of reversal pattern is that sellers got exhausted and were quickly overtaken by buyers on Dec. 12. This should see follow-through buying over coming weeks.

5. Also, analysts are still backing DG….

• On Tuesday, 11th December, 2012, Piper Jaffray reiterated its Overweight rating on Dollar General but reduced its price target from $61 to $49.

• In a report published Wednesday, 12th December, 2012, Credit Suisse Group reiterated its Neutral rating on Dollar General Corp., but lowered its price target from $56.00 to $48.00.

• On the same day, Citigroup reiterated its Buy rating on Dollar General Corp., but lowered its price target from $65.00 to $55.00.

• And on Friday, 14th December, 2012, Deutsche Bank reiterated its Buy rating on Dollar General Corp., but lowered its price target from $55.00 to $50.00.

Therefore, based on the facts above the following options trade is recommended…..


**OPTION TRADE: Buy the DG May 2013 46.000 call (DG130518C00046000) at or under $1.75, good for the day. Place a protective stop limit at $0.80 and a pre-determined sell at $3.00.



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