Stock Correction Could Be a Buy Signal for This Stock

DLTR stock is testing support atop its 20-week moving average

Feb 9, 2018 at 1:36 PM
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The stock market tailspin of late has triggered the fastest exodus of bulls in decades. However, the recent correction could present buying opportunities for speculators who believe past is prologue. In fact, Dollar Tree, Inc. (NASDAQ:DLTR) stock tends to be among the best to buy after sharp S&P 500 Index (SPX) drops from record highs. Below, we take a look at why the discount retailer could be a bargain at current levels.

Following a steep S&P sell-off -- defined for these purposes by two consecutive drops of at least 1%, within a month of an all-time high -- DLTR stock has been outstanding. Specifically, after the last 10 pullbacks of this kind, Dollar Tree shares were higher one month later nine times, averaging a gain of 10.57%, according to data from Schaeffer's Senior Quantitative Analyst Rocky White.

Since touching a record peak of $116.65 on Jan. 31, DLTR has dropped with the broader equities market. However, the shares seem to have found support atop their 20-week moving average. At last check, the equity was 0.5% higher on the day, trading at $102.08. A similar 10.57% surge from current levels would place DLTR stock around $112.87 -- back above its 10-week moving average.

Plus, an exodus of new options bears could add fuel to the security's fire. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 1.37 is higher than two-thirds of all other readings from the past year. This indicates that options buyers have picked up Dollar Tree puts over calls at a much faster-than-usual pace during the past two weeks.

It should also be noted that DLTR has tended to reward option premium buyers. The stock's Schaeffer's Volatility Scorecard (SVS) stands at a lofty 98, indicating the shares have handily exceeded options traders' volatility expectations during the past year.

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