Home Depot Inc (NYSE:HD) stock fell about 2.5% on Tuesday after the company’s latest earnings report — and that was something of a surprise. That’s because the pressure on HD stock came despite positive earnings and upped guidance.
While there may have been some other more near-term technical issues at work that caused Tuesday’s selloff in HD shares, for now, I have to side with the idea that if a stock can’t go higher on good news anymore, maybe a large part of the good news is already baked in.
Thus, when it comes to Home Depot stock, I think the risk-reward equation favors the bears.
Home Depot reported better-than-expected top and bottom lines on Tuesday, then went on to raise its profit and revenue guidance for the full year. Now, HD expects to earn $6.27 per share (versus a previously estimated $6.18) on revenues that should grow 6.3%.
Analysts who are bullish Home Depot stock were busy staunchly defending the underlying growth story Tuesday. I don’t necessarily disagree with that view, but the price action yesterday (and the past few weeks) has signaled something different in the nearer-term.
Home Depot Stock Charts
First, let’s look at the multiyear weekly chart. Note that after a strong multiyear bull trend, HD shares’ momentum became exhausted in Q1 2015, though price has continued to rise. This does not have to spell the end of the bull run, but it’s something to watch.
Also note that the entire bull run has taken place within the confines of a cone-shaped channel where only a push to the very upper end of the channel in the past led to any meaningful pullbacks or consolidation phases. From that perspective, you could actually argue that Home Depot stock has more room to run to the upside.
However, keeping that picture in mind, let’s now look at the next weekly chart. Here, you can see that since early April, HD stock has tried (but failed) to break above its November 2015 highs. Over the past few weeks, the weekly candlesticks have showed buyer exhaustion. Last week, a better bearish reversal took place where Home Depot closed at the very low end of the weekly range after a failed rally attempt.
So far this week, after Tuesday’s selling pressure, Home Depot stock is attempting to confirm last week’s bearish reversal with further selling pressure … though obviously the current week is not yet over.
Finally, on the daily chart, we now see some similarity to what took place in HD shares in early January, where the near-term 8- and 21-day moving averages are slowly turning down and the stock is breaking below its consolidation phase that I marked with the blue box.
Active investors and traders should look to leg into a short position in Home Depot stock. Target the mid-$120s over the next few weeks, and use the $136 area as a last-resort stop-loss.
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