After a near-vertical rally from November 2017 into late January 2018 shares of Home Depot Inc (NYSE: HD) have spent the past two months in mean-reversion mode to the downside. While there is the potential for this to ultimately end in a bigger corrective move for HD stock, for now a trading bounce opportunity is beginning to set up for traders and active investors.
Before looking at the charts of Home Depot stock, allow me to remind ye faithful again that the stock market is a highly correlated asset class, certainly as compared to other asset classes like currencies and commodities. In other words, when the stock market is in bull or bear mode, the majority of stocks (somewhere around 60%-80% of them) will move up and down with the broader indices.
Traders and investors must understand this dynamic or risk trying to make idiosyncratic bets (single stock bets) that all else being equal stand little chance of being profitable.
HD Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
To wit, looking at the longer-dated multi-year weekly chart we see that the vertical ascent from November 2017 into late January 2018 pushed HD stock above its longer-standing up-trending channel as marked by the black parallels. Although such vertical ascents can last longer than an impatient short seller might think, ultimately odds are high that a mean-reversion lower toward at least the upper end of trend takes hold.
The roughly 17% drop in HD stock since its January highs has thus far acted as a healthy mean-reversion move to take some air out of the stock.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart, we see that the drop in HD stock since late January had it slice through its yellow 50-day and blue 100-day moving averages until it finally yesterday arrived at the red 200-day simple moving average. Note that the area around this moving average also lines up with a simple up-trending support line from November 2016.
Lastly and from a momentum perspective we see that the MACD momentum oscillator is now at oversold levels last seen in early 2016.
What in my eye is still missing for a valid bounce trade is a confirmation buying day, i.e. a real up-day in the stock. If and when this takes place, then a trade back higher toward $184-$185 looks to be in the cards, using the 200-day moving average as a simple stop loss area.
Check out Anthony Mirhaydari’s Daily Market Outlook for April 3.
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