Shares of Home Depot Inc (NYSE:HD) have rallied nearly 15% since I declared them oversold and ripe for a counter-trend bounce trade on Feb. 9. While Home Depot stock has been a good trade that was also supported by a lift in the broader stock market and risk assets overall, the trade was counter-trend, and now it’s time to take profits.
More active investors and traders should even be on the lookout for the next opportunity to get short HD.
Before looking at the charts of Home Depot stock, allow me to say a few words on time frames. In all markets, but particularly in bear markets, it’s important to have a good handle of a) one’s time frame in a trade or investment and sticking to it, and b) understanding the near-, intermediate- and longer-term trends of any given stock or market.
As for the current broader U.S. stock market — and for HD, for that matter — it would look something like this:
- Long-term trend: Higher and in secular bull market
- Intermediate-term trend: Lower and in cyclical bear market
- Near-term trend: Increasingly overbought and ripe to continue lower in direction of cyclical bear market
This is always subject to both change and interpretation, but it’s good to have some sort of road map in multiple time frames, as it allows us to better manage risk.
So, let’s apply this approach to the charts of Home Depot stock!
Home Depot Stock Charts
After a steep, nearly 400% rally off the 2011 reaction lows, HD shares finally topped out in December of last year. While Home Depot is completing its intermediate-term topping pattern, the stock still looks well on its way to ultimately seeing a bigger mean-reversion or corrective wave lower.
In the longer-term, HD stock in 2013 along with the broader U.S. stock market broke out of a secular bear market into what I now consider to be a secular bull market that should have another five or more years to run. From a cyclical aspect, however, the sharp rally off the 2011 intermediate-term lows has Home Depot looking overextended, which is to say that tactical traders should look to sell the rallies in more size rather than playing the counter-trend bounces.
Momentum, as represented by the Relative Strength Index at the bottom of the chart, since early 2015 has favored a lower intermediate-term trend for HD stock and ultimately this could see the stock mean-revert back into the blue zone on the chart. This zone is roughly between $70 and the low $80s and would constitute a retest of the 2013-14 breakout area.
On the daily chart, note that after I shared my trade idea in this column on Feb. 9, the stock proceeded to bounce about 15% and has now arrived at horizontal resistance as marked by the blue zone around the mid- to high $120s. Nearer-term momentum oscillators such as the MACD are also finally in overbought readings for the first time in this bear market bounce.
Furthermore, keeping in mind that the likely intermediate-term trend is lower in the stock, I want to take full profits in what was a nicely profitable counter-trend bounce in HD stock.
After taking profits, active investors and traders could look to short Home Depot stock upon a confirmed bearish reversal day, which has not yet taken place.
Like what you see? Sign up for our daily Beat the Bell e-letter and get Serge’s investment advice delivered to your inbox every morning! Download Serge’s Free Special Report: 6 Keys for Successful Trading and Investing.
