Home Depot Inc (NYSE:HD), as of Monday’s close, is off by about 2.8%. While Home Depot stock has seen a few rallies and selling sprees along the way, in the aggregate, HD just slowly but steadily pushes higher. As such, I’m recommending that traders and investors in HD stock let the trend be the friend … until it ends.
In my nearly 20 years as a trader and investor, I’ve found that the vast majority of market participants — regardless of their level of sophistication or experience — tend to over-analyze and over-complicate. The result? Some version of analysis paralysis that leads to badly timed trade entries and exits.
One of the most successful investing strategies of all time is a strategy called “trend following.” It’s simple: You ride intermediate- to long-term trends in stocks or other assets, whether that trend is higher or lower. In that vein, a stock like Home Depot could’ve been traded up, down and in circles many times over the past year. But a simple trend-following strategy would’ve outperformed any more hectic strategies by a mile.
The same likely applies to shares of Lowe’s Companies, Inc. (NYSE:LOW), which in the larger picture also continue to trend higher along a primary and well-defined trend line.
But for now, we’re talking about HD stock. So let’s move to the charts.
Home Depot Stock Charts
Speaking of trend lines, note that HD shares have pushed higher in a well-defined channel. Here we see that a simple strategy of buying the stock on pullbacks to the lower end of the channel, upon the confirmation of a weekly bullish reversal — and selling the stock upon weekly bearish reversals at the upper end of the trend — would have worked like a charm.
All else being equal, this strategy continues to work. Home Depot stock once again sits at the lower end of this channel, where we should soon either get a weekly bullish reversal candle or not. In other words, HD shares will either reconfirm the mother trend or not, at which point the long-standing trend would, by definition, end.
On the daily chart, we see that while the mother trend remains intact, Home Depot’s price action since late 2015 has formed a series of three failed rallies, each of which is pushing its weight on the red dotted diagonal support line. Prudent bears will point out that a weekly close below this support line could open up a trap door that sees the stock falling toward the February lows around the $110 area.
Considering the longer-standing up-trending channel that remains in place for HD stock, however, we must first see a decisive weekly break below this channel (i.e., below about $127 in current price terms) for a bear case to become more likely.
For now, trend followers should still be looking for a potential strong bullish reversal to take place near current levels, such as we saw in February and again in late June.
If and when such a bullish reversal were to take place, then upside back toward the high $30s should be the likely path of least resistance.
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