Build Yourself a Trade in Home Depot Stock

Home Depot stock - Build Yourself a Trade in Home Depot Stock

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Home improvement stocks like Home Depot (NYSE:HD) and Lowes (NYSE:LOW) are on the move. The pair recently lifted to new record highs amid some serious muscle-flexing. But it’s the price pattern in Home Depot stock that is catching my eye today. Let’s dissect its chart and discuss a potential trade idea.

The weekly view chronicles the big picture of HD’s rise. It suffered amid the Jan-Feb market crash but like the S&P 500 has finally reclaimed its prior peak. This year’s price action has taken on the form of a cup-and-handle pattern that just completed with last week’s breakout. Though the weekly candle ended with a topping tail, I find the selling acceptable. Since its upswing ran from $191 to $215, some profit-taking is more than justified.

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Source: OptionsAnalytix

What traders should be eyeing is the depth of the retracement. How far buyers allow the bears to push things reveals just how strong this uptrend is. We can use the daily chart to identify the ideal location for traders to halt the descent. Old resistance at the top of the cup-and-handle pattern is the first logical spot for buyers to defend their turf. Even if it fails to become support, the 20-day  moving average and other prior resistance zones loom closely.

Click to Enlarge
Source: OptionsAnalytix

The strength of Home Depot stock’s last rally suggests we should give it the benefit of the doubt that this dip gets gobbled up. The RSI indicator confirmed momentum was increasing.

Home Depot Stock Trade

With an implied volatility rank of 10%, it’s hard to get excited about selling premium. Let’s build a bull call spread instead.

To increase the odds of success, we’ll use an at-the-money option. Buy the Nov $210/$215 call spread for $2.30. The risk is limited to the initial cost and will be forfeit if HD sits below $210 at expiration. The reward is $2.70 and needs the stock to rise above $215.

As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.

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