Home Depot Inc (NYSE:HD) shares are feeling the pain of the broader stock market selloff, and following Monday’s risk-off day, Home Depot stock is off more than 15% for the year. That’s a huge contrast to 2015, in which HD shares showed great relative and absolute strength, and the stock increasingly is developing a concerning topping sign.
However, in the immediate- to near-term, the selling pressure in HD stock is overdone — in fact, Home Depot is flashing its most oversold readings since the year 2000, by some measures.
Thus, active investors and traders should be looking to play a bounce in Home Depot stock before looking to go short again.
Housing data looked good and improved through the first part of 2015, which at least in part helped propel HD stock higher last year. But as that data began to taper off and slow on year-over-year comparisons in the second half, Home Depot continued to rise regardless.
The selling pressure in Home Depot stock since late December thus looks like investors waking up to the reality that economic data and housing data aren’t as rosy as previously thought. While shares of Home Depot and homebuilder stocks don’t move in lockstep, they do trend in the same direction. So it was curious to see most homebuilder stocks top out in summer or fall of 2015, while HD stock continued to push higher into year’s end.
Home Depot Stock Charts
Starting off with the big-picture view, we see that HD stock saw an orderly incline since 2011, but one that ultimately in November/December of last year led to a classic overshooting move. The fourth-quarter rally marginally pushed the stock out and above the multi-year channel, thus taking an already steep slope into vertical ramp mode.
These types of moves are never sustainable, and Home Depot stock has since come back down to earth and into the trading channel.
Note also that we saw significant negative divergence between momentum and price in 2015, all of which is now weighing on the stock.
On the daily chart, we see that HD shares are developing a bigger topping phase that ultimately should see them hit a downside target around the $100 mark, or lower.
Late last week, Home Depot stock broke below its red 200-day moving average for the first time since 2014, but after Monday’s selling, it has now also reached the black horizontal line, which we could look at as the neckline of a head-and-shoulders topping pattern.
Although some marginal further downside in the immediate-term cannot be ruled out, typically a neckline does not get broken in a straight shot before first bouncing and shaking out the weak short sellers.
From a momentum perspective, note that the MACD in January reached its most oversold readings since the year 2000 and still remains very oversold on a near-term basis.
Active investors and traders could look to play a bounce off current levels with a price target near $120.
From a risk management perspective, it is important to note that Home Depot is scheduled to report earnings on Feb. 23. That is to say, it might be best to exit any oversold bounce trade before the earnings release.
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