Trade of the Day: Home Depot Inc (HD) Stock Is a Breakout Candidate

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Shares of home improvement retailer Home Depot Inc (NYSE:HD) rallied nearly 2.4% yesterday in good part due to the devastating weather effects of late and what may still be to come from hurricane Irma as rebuilding efforts and thus demand for Home Depot goods and services might spike further. As a result, HD stock on Wednesday staged a technically sound move that may have signaled the beginning of the end of a multimonth consolidation period.

HD Stock: Home Depot Inc (HD) Stock Is a Breakout Candidate

As a general principle and as I often make clear in this column, I tend to prefer buying stocks that belong to sectors or groups in near-term bullish trends. Home Depot belongs to the consumer discretionary sector, which currently, as per my proprietary trend-measuring scanners, and despite the recent bounce, near-term neutral but both intermediate and longer-term bullish.

HD Stock Charts


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Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week

Looking at the multiyear weekly chart, we see that the primary up-trend for HD stock remains firmly intact and that the intermediate- and longer-term trends have well-defined support not only at the lower end of the up-trending channel (blue parallel arrows) but also at the blue 100-week simple moving average.

Thanks to a sharp rally earlier this year, HD stock by mid-May once again reached the upper end of this channel, where the stock promptly began to slip into a consolidation phase that at its lows had it trading near the middle of the trading channel. This consolidation phase over the past four months and through this lens has taken the shape of what we refer to as a “bull flag pattern” that, as the name implies, tends to have bullish implications for the security in question.

In many ways HD stock is acting well through the lens of trend-following as well as of technical analysis 101.


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Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day

On the daily chart, we can dig a little deeper into the recent months’ consolidation phase. Here we note that the lows marked by the blue bubble could also be viewed as the head of an inverse head-and-shoulders pattern, which is yet again a bullish pattern.

With yesterday’s rally, HD stock has scored a marginal breakout of this consolidation phase. From a technical analysis perspective as well as taking into account the devastating potential effects of current hurricanes in the United States, HD stock could indeed see a continuation of this breakout toward the $165 area. This breakout, however, does not have to take place in a straight line and any sharp bearish reversal could call off the bullish trade setup for the time being.

Check out Anthony Mirhaydari’s Daily Market Outlook for Sept. 7.

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