Editor’s note: Serge Berger, the head trader and investment strategist for The Steady Trader, will be providing the Trade of the Day until Sam Collins returns on June 27.
Home Depot (NYSE: HD) — This American icon staged a 5.5% rally yesterday. Fundamentally speaking, I hear that Home Depot and Lowe’s (NYSE: LOW) stores are jam-packed. It’s not clear what the reasons are for the sudden home improvement spurt. Likely, either people feel better about their financial future, which is a positive sign for the economy, or they’re attempting to sell their homes. For Home Depot’s stock, it’s irrelevant, as more demand is good whatever the underlying reasons.
More recently, the difficult spring weather had an impact on the stock price, as it is off approximately 10% from the sell signal on May 17. The miserable pending home sales number that came out on May 27 (-11.6% versus -1.4% consensus) certainly didn’t help the price of Home Depot’s stock. Yet, my current bullish view on HD is rooted in the monthly chart.
A little perspective goes a long way. Looking at a chart dating back to 1999, one can clearly see the downtrend during 2000 to 2010. More importantly, in January of this year, HD broke higher and out of this decade-long downtrend and is currently retesting the downtrend line from the upside.
From January through May, the stock bumped into a major resistance zone between $38 and $39.50 several times, and finally, after trying it one last time on May 17, gave a clear doji sell signal that, over the following several weeks, took the stock below its 50-day and 200-day moving averages.
Yesterday, HD completed a so-called star and gap formation, which is a derivative of the morning star candlestick formation. If you are not familiar with candlestick analysis, let me explain. This three-day formation shows a fairly violent sell-off at the bottom of a trend, followed by an indecision day, and at last, a gap up and breakaway on the last day. Sellers lost their strength, and after an indecision day, buyers took the chance to step up to the plate.
Of course, after the roughly 10% sell-off since mid-May, some backing-and-filling would be expected, and HD still trades fairly close to its 200-day simple moving average. A trade to the upside can be entered here with stops at Monday’s low near $33.40 and an ultimate upside price target of the May 17 high near $38.
