Stock Of The Day: Has Dollar General Reversed?

Dollar General Corporation (NYSE:DG) is gaining a little ground on Tuesday. The stock was strong ahead of its earnings report, but despite today's move, the overall trend may have reversed.

• How are DG shares doing now?

A classic Japanese Candlestick pattern has appeared on the chart. It could have bearish implications, and it's why Dollar General is the Stock of the Day.

Charts are graphical illustrations of investor and trader emotions and psychology. Candlestick charting was first developed by rice traders in Japan in the 1500s. Traders then experienced the same emotions and psychology that traders do now.

This is why the same patterns have appeared on charts for 700 years.

Dollar General formed a classic “bearish engulfing” pattern on the chart yesterday. But the name of the pattern isn't important. What is important is to understand the trading action and dynamics that made the pattern form on the chart.

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On Monday morning, it looked like the recent uptrend was going to remain intact. The opening price was higher than Friday's closing price.

But by yesterday’s close, the tide had turned.

The sellers took control and overpowered the buyers. The stock ended up closing lower on the day.

Importantly, it closed at a lower level than Friday's opening price. It engulfed the prior day's trading range.

This is important because most volume for stocks typically trades around the open or closing prices. This means there tends to be support at these levels if a stock eventually revisits them.

The fact that Dollar General traded through these prices shows that the sellers are aggressive and impatient. Despite today's bounce, it could be a sign that a new downtrend is forming.

If understood and applied correctly, technical analysis is the study of investor and trader psychology in the markets. Even though society and technology have evolved and changed over the past seven centuries, human psychology has not.

Traders and investors who understand this will be able to gain profitable insights from reading charts.

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