Mapping the Market: After hot run, Dollar Tree shares could rally further

Shares of Dollar Tree have rallied about 30% in just over a month, and ​there are signs that more gains could be in store, technical analysis indicates.

CHART Click ​here for a detailed technical analysis chart.

Technical analysts use ‌charts ​of price history to map out where a stock might go next. To do this, they often rely on recognizable patterns that have become associated with gains or losses. One of those patterns is called a cup and handle, and it ‌has historically preceded gains. A cup-and-handle formation has taken shape on the Dollar Tree chart.

What usually happens is the cup shape of the pattern forms after a stock rises and then retreats slightly as the market catches its breath. As the pullback loses steam, it forms a rounded bottom before the stock rises again, etching out the right side of ‌the cup. After that, another slight retreat occurs — forming the handle — before the shares take off higher again. The pattern is complete when the stock breaks above a ‌line connecting the left and right sides of the cup.

Analysts use the pattern to project future gains based on the depth of the cup. In Dollar Tree’s case, the stock broke out of the pattern between $135 and $136, so the potential price target based on the formation could be above $180. When technical analysts see a chart pattern pointing to gains in a stock, they usually look for other factors to support the ⁠view. Measures ​of momentum and volatility are often helpful.

One ⁠of those measures is called the Relative Strength Index, which gauges the speed and magnitude of recent price changes. Another is called Moving Average Convergence Divergence, or MACD, which compares two moving averages to ⁠determine whether a stock move is gaining or losing strength. Analysts also use Bollinger Bands, a measure of volatility that gauges variation from a central moving average. All three of these measures indicate Dollar ​Tree could extend its gains.

As a stock rises, analysts look for something called resistance, which is a level that acts as a cap on the ⁠price. Previous lows and highs are often good sources of resistance. On its path to the potential target around $180, Dollar Tree faces resistance at $151, $155 and $161 — corresponding roughly with previous highs. After that, more resistance would come at its ⁠all-time ​high of $177.19, which it struck in April 2022, according to data supplied by LSEG.

However, there are always risks that a stock can fall as well as rise. If Dollar Tree shares were to weaken below the $131-$132 area, then the bullish view would come under question. Dollar Tree did not immediately respond to a request ⁠for comment submitted on the company's public relations portal.

What the chart shows: (Mapping the Market is a daily column written by Reuters journalists. The commentary is based on a technical analysis of financial charts, which helps assess the likelihood of future price moves but does not guarantee the outcome. The column ‌does not constitute investment advice ‌or trading recommendations. )

(Christopher Romano is a Reuters market analyst. The views expressed are his own. ​Editing by Burton Frierson and Matthew Lewis)