Home Depot Inc: Two Sides to HD Stock

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Shares of Home Depot Inc (NYSE:HD) rallied along with the broader market on Tuesday, completing a two-day bullish reversal that now puts the stock in a near-term favorable posture. HD stock in the bigger picture remains in a bullish trend, which favors higher prices, at least until the stock reports its next batch of earnings on Feb. 24.

Home Depot Inc: Two Sides to HD Stock When looking at stocks, arguably the ‘thing’ that is the cause for most disagreements among investors and traders is the time frame one is looking at.

Most market participants would likely agree that a stock’s near-term prospects can differ completely from the medium- and the longer-term. Yet by not making clear which time frame one is considering, it leaves the door wide open for arguments.

This is why each morning in this column I look at both the near- and medium- or longer-term prospects of a stock, which not only helps for perspective but is crucial for risk management purposes.

Home Depot Stock Charts

Through the multi-year lens HD stock continues to trend higher, although upside momentum as represented by the Relative Strength Index (RSI) at the bottom of the chart is well in overbought territory. Importantly, however, this is no ‘sell signal’ but rather a confirmation of a strong trend.

If we overlay the Bollinger Bands (blue lines) we see that after HD stock consolidated sideways from mid-2013 until mid-2014 and ever since the breakout in August 2014 the stock has been trending higher between the mid-point Bollinger line (red line) and the upper line. This, too, confirms a strongly trending stock, which however the longer this strong trend persists the more it will be at risk of a mean-reversion move lower.

From where I sit the next ‘risk date’ for HD stock is around its earnings date on Feb 24.

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If we zoom in on the daily chart of HD stock, we see that it has bounced off its rising 50-day simple moving average (yellow line) four times since mid-November. The most recent of those bounces took place on Monday, when the stock staged a sharp intraday reversal higher after a bump into the 50-day, which on Tuesday was followed with continuation buying that nearly took the stock back to all-time highs set last week.

In the near-term, the stock thus now sets up for more upside on the back of this two-day bullish reversal.

Active traders and investors could consider buying the stock around the $107 mark for a cash-flow trade that may get the stock into the $111-$112 area before the earnings report later this month.

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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.

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