Discount retailer Dollar General (DG) took a breather in November after a torrid climb up the charts earlier in the year. However, despite turning in five weekly losses in the past six weeks, DG has brushed up to a trendline of historically bullish implications, if history is any guide.
Specifically, Dollar General stock recently slid all the way down to its 100-day moving average. There have been four similar pullbacks after a lengthy stretch above the trendline during the past three years. After which, the shares averaged a one-month gain of 9.3%, and were higher 75% of the time, per data from Schaeffer’s Senior Quantitative Analyst Rocky White. At last check, DG was trading at $153.84, so a bounce of similar magnitude would push the stock past its Oct. 23 record high of $166.98.
Daily Stock Chart DG
What’s more, implied volatilities on the equity are at low levels, with the equity’s Schaeffer’s Volatility Index (SVI) of 36%, now registering in the 25th percentile of its annual range. If the SVI holds steady around its two-year average over the next couple of weeks, White’s modeling shows that an at-the-money DG call option could potentially return 215% on another expected bounce from support at the 100-day trendline. In other words, prospective call buyers could more than triple their money on a 9.3% gain in the shares.
It’s also worth noting that Dollar General steps into the earnings confessional for its third quarter report before-the-open on Thursday, Dec. 5. Looking at the discount retailer’s earnings history, the security has closed higher the day after reporting in four of the past eight quarters, including a 10.7% post-earnings pop back in August. During this time frame, DG has moved an average of 6.3% regardless of direction. This time around, the options market is pricing in a much larger post-earnings swing of 9.3%.
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