Stock Of The Day: Classic 'Bull Trap' In Dollar General?

Dollar General Corp DG shares are trading lower Wednesday. This comes after yesterday's surge of more than 15%.  The move was driven by the news that same-store sales increased by 5.4%. This was ahead of estimates.

There is a good chance the move lower continues. A classic bull trap may be occurring. This can be a bearish dynamic and it is why Dollar General is our Stock of the Day.

Resistance in a market is a price level or narrow range where there is a large amount of sell interest.

If a stock is trending or moving higher, it is because there aren’t enough sell orders to fill all of the buy orders. As a result, the traders and investors who wish to buy are forced to pay premiums and outbid each other. This is the only way they can draw sellers into the market.

When a stock reaches resistance, the move can pause or end.

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Sometimes, stocks head lower after reaching resistance. This happens when the people who created the resistance with their sell orders start to undercut each other's price.

They know the buyers will go to whoever is willing to sell their shares for the lowest price, and they don't want to miss out.

Sometimes the buyers overpower the sellers at a resistance level. This moves the price higher and traders say that the resistance has been broken.

A breakout can be interpreted as a bullish dynamic. It can mean the sellers who created the resistance are out of the market. With this large amount of supply gone, buyers will be forced to outbid each other again to acquire shares and this moves the price higher.

But sometimes the sellers only appear to have left the market. They are actually on the sidelines being patient.

When they return to the market, they can push the stock back below the resistance level. What appeared to have been a breakout can turn into a reversal.

Traders say that this is a ‘false breakout' or a ‘bear trap'.

These can be good contrarian signals and suggest the stock has reversed and a new downtrend is forming. If this is the case with Dollar General, the move lower may have just started.

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Courtesy: Dollar General