The Perfect Holiday Retail Buy for Call Traders

Signals are saying buy the dip on Dollar General (DG) stock

Managing Editor
Dec 10, 2021 at 8:00 AM
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The last two weeks have been volatile for the broader market, to say the least. The Dow Jones Industrial Average (DJIA) suffered its worst day of 2021 on Nov. 26, while November was the Cboe Market Volatility Index’s (VIX) best month of the year. The major trigger for Wall Street’s recent whiplash has been the newly-founded omicron Covid-19 variant, but Wall Street has also been marred by a bout of profit-taking and seasonal headwinds.

Far from immune to this whiplash has been the retail sector, and it’s doubly worse for those slated to report quarterly earnings this month. One of the few subjected to the combination this past week was budget retail chain Dollar General Corp. (NYSE:DG). The company reported earnings before the bell on Tuesday, Dec. 2, and subsequently suffered a more than 3% daily drop on the heels of tepid sales and a less-than-malleable profit forecast.

Ahead of this post-earnings drop, DG wasn’t doing much better, stuck in a channel of lower highs since touching its Aug. 11 record peak of $239.35. Regardless, the equity has managed to remain above its year-to-date breakeven mark, and Friday pulled back to support at the $215 floor. What’s more, the Dollar General stock looks to be approaching a historically bullish trendline.

Specifically, Dollar General stock just came within one standard deviation of its 200-day moving average, after spending a considerable amount of time above this trendline. According to data from Schaeffer's Senior Quantitative Analyst Rocky White, six similar signals have occurred in the past three years. The security enjoyed a positive return one month later in 50% of those instances, averaging a 2% gain. From its midday Friday perch of $222, a move of similar magnitude would put DG just below $227.


Meanwhile, in the options pits, a shift in sentiment could trigger a surge in DG shares. This is per Dollar Tree stock's 10-day put/call volume ratio of 1.33 at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), which stands higher than 93% of readings in its annual range.

Lastly, the equity's Schaeffer's Volatility Scorecard (SVS) stands at 79 out of 100. This suggests DG has exceeded options traders' volatility expectations during the past year.

Subscribers to Chart of the Week received this commentary on Sunday, December 5.


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