The chart of Home Depot Inc (NYSE:HD) spells trouble. Last month’s crash upended its uptrend and weakness has hounded it ever since. With bulls abandoning ship, it’s time to take a good look at bearish Home Depot stock trades.
To set the stage let’s first consider the posture of its industry using the SPDR S&P Homebuilders (ETF) (NYSEARCA:XHB). For obvious reasons stocks are very sympathetic to industry trends and Home Depot is no exception. XHB was flying high, flashing bullish signs galore heading into the end of January. Then, the market gods flipped a switch, and the fund went from heavenly to hellish.
Distribution days ballooned and XHB lost its buoyancy. A series of lower pivot highs have followed. Worse yet, XHB actually eclipsed the crash lows during its latest downswing showing some serious relative weakness.
Last week’s rebound has done nothing but return the fund to resistance, a zone that bears will likely defend with vigor once more.
Home Depot stock is suffering a similar fate. Its 50- and 20-day moving averages are now descending and HD stock has been rejected twice now at the 20-day. Selling pressure persists and bears are smacking down all rally attempts like Dikembe Mutombo.
The descending triangle that has formed is pointing to lower prices and all that remains for completion is a breakdown of the $177 support zone.
Here’s the bottom line: If you’re seeking bear trades and believe that weakness begets weakness, then HD is the way to go.
The Home Depot Trade
While we could go for the jugular and buy put options, strength from the broader market has me thinking a higher probability play is better. That way if Home Depot defies gravity by treading water or rallying slightly in the coming weeks we can still profit.
Sell the April $190/$195 bear call spread for 60 cents. Consider it a bet that the stock remains below $190 for the next month. If it does, you will capture the max reward of 60 cents. The initial cost (and risk) is $4.40. To minimize the damage if wrong, close the trade on a price break above $190.
As of this writing, Tyler Craig didn’t hold positions on any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.