Yes, the stock market has had several rough weeks over the past few months and most stocks seem to be trending lower. Even though I have yet to find any stocks that haven’t sold off to some extent, there are a few stocks still maintaining an overall trend higher. In addition, there are the rare few that are near 52-week highs. Stocks that have held their ground through the current market sell-off, and are near their 52-week highs, could be the ones that rally strongest if the market eventually does move higher.
As I’ve mentioned in previous articles, when it comes to entering a stock hitting a 52-week high, I prefer to look for ones hitting a “NEW” high. To me, his would be a stock that hasn’t hit a new 52-week high in quite some time. In addition, and more importantly, I want the stock to have broken through a key area of resistance. This way I know that it wasn’t just any move higher. One such stock that fits that description would be DLTR (Dollar Tree, Inc).
To review Dollar Tree’s stock, please take a look at the 1-year chart of DLTR (Dollar Tree, Inc) below with my added notations:
As you can see, DLTR has been in a large sideways move for the last 3 months while running into a clear resistance at $70 (red). Even though the market has caused most stocks to break lower, DLTR has held trend so far. DLTR also appears to have strong support at $60 (green). If DLTR could break through $70, it would be breaking to both a new 52-week high and through a clearly defined resistance level. Also be aware of the “min-level” at $65 (blue) during any pullbacks.
The Tale of the Tape: While stuck in a sideways move, DLTR has formed a key resistance level of $70, which would be a 52-week high breakout if DLTR were to break above it. This should signal higher prices ahead for the stock. A long trade could be entered if DLTR breaks out above $70, or on a pullback to $65, with a stop set below the entry point either way. If the market were to sell-off substantially, and bring DLTR back down to $60, a long position could also be entered there with a stop below that level.
Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!
Christian Tharp, CMT