Overheard at Davos: Which Cartload of Stuff is Better?

While Davos Panels discuss worldly events I have a more basic question. Family Dollar operates stores that sells lower end household products and Dollar Tree stores that sell all the stuff that comes in your kids birthday party favor bags. So if you loaded up a shopping cart at each store, which load of crap is better? The party favors of course! Let me prove it with a few charts. Below is the daily chart for Family Dollar (Ticker: FDO).

This chart is not good. After basically rising in and above a 1 year channel, the price fell out of that channel at the beginning of the year and is testing and losing support of the 200 day Simple Moving Average (SMA) for the second time in two weeks, with all of the SMA’s rolling lower. After falling out of the Bollinger bands it is now firmly back into the bottom half and waiting for the Relative Strength Index (RSI) to work off its oversold condition. When that happens it may test support at the 39.60 gap area from July. Ugly. But what about Dollar Tree (Ticker: DLTR)? Below is its chart.

This chart is not much better. It also had a good run higher and has fallen in the new year. It is also moving back into the Bollinger bands. It is in a bearish flag, but it is testing resistance of its 100 day SMA, from below and has a Moving Average Convergence Divergence (MACD) indicator that has just crossed higher. The RSI bounced off of the oversold area but looks like it may be turning back down. Not quite ugly but certainly not pretty. Now put the two together, as the ratio chart below does.

The ratio of FDO to DLTR shows some interesting information. First there is clear support at 0.76 with 4 previous bounces there in May and June 2008, December 2008 and September 2009. Next, the move from the peak in April 2009 to the trough in September 2009 was retraced by about 50% in a rounding top pattern. Finally, the shorter term support at 0.84 has recently been broken to the downside.

Trade Idea: Short FDO and go Long DLTR at the ratio of 0.83 with a stop loss at 0.84 and a target of 0.76

Shorting 1,200 FDO and buying 1,000 DLTR can earn $4,320-$4,737 on a ratio move to 0.76, and risks about $640 if you are stopped at the 0.84 ratio. So clearly the load of crap from DLTR is worth more. Trade’m well.

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

If you like what you see above sign up for deeper analysis and trading strategy by using the Get Premium button above. As always you can see details of individual charts and more on my StockTwits page.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

blog comments powered by Disqus
Dragonfly Caps Blog