Home Depot had a strong quarter, but the stock is struggling to maintain its post-earnings gains. Here’s the trade.
At one point, retail was one of the few bright spots in the market. Top-performers in the group, like Target (TGT) – Get Target Corporation Report and Costco (COST) – Get Costco Wholesale Corporation Report, were trading well, while others, like Home Depot (HD) – Get Home Depot, Inc. Report were trying to find some upside momentum.
The bulls thought they might have found it on Tuesday morning: Home Depot was up 5% at its highs after reporting earnings before the open. Even better, the stock was threatening to push through a key technical area.
Instead, the stock reversed, gave up its gains on the day and fell into the red. At last check it was a bit into the green.
That’s despite an easy earnings and revenue beat, along with same-store sales and comp-store sales results that topped analysts’ expectations. Management even delivered a strong full-year outlook.
So what’s sapping the stock’s energy?
Perhaps it’s the discouraging commentary and results from Walmart (WMT) – Get Walmart Inc. Report, which is down 10% on its disappointing quarterly results. Maybe it’s just the stock’s behavior as it’s trapped below resistance.
While there’s hope that Home Depot stock can make a recovery rebound, we can’t ignore the charts.
Trading Home Depot
Weekly chart of Home Depot stock.
Chart courtesy of TrendSpider.com
Today’s rally looked marvelous … for a moment.
Home Depot stock was launching over $300, as well as the 10-day and 21-day moving averages. It was even momentarily clearing its biggest hurdle lately, which is the 50-day and 10-week moving averages.
Clearing all these hurdles would have been a huge achievement and would have marked a potentially enormous shift in momentum.
Not only would the technicals have cleared the way to significantly higher prices, but the fundamentals would be working in tandem.
That’s on the more obvious front — like a better-than-expected quarter and a strong outlook — but also with knowing that Home Depot is entering its strongest quarter of the year with some momentum.
Not all hope is lost, but it suffered a difficult blow with today’s fade.
From here, I would love to see it close above $300. That improves the odds that it can burst back over today’s high. If it can clear Tuesday’s high, then Home Depot stock can clear a ton of technical resistance.
In that scenario, it could open the door up to the $340 to $350 area.
That’s how far Home Depot stock could rally if momentum returns. Keep in mind, this stock was trading at $420 not that long ago. There’s also quite a bit of bullish divergence to monitor on the Relative Strength Index reading at the bottom of the chart.
On the downside, keep an eye on this month’s low near $280. Should we fail to close above the 10-day, this level could remain vulnerable. Below $280 and that opens the door down to the rising 200-week moving average.
