Shares of Home Depot (NYSE:HD) tumbled more than 5% on Tuesday, Nov. 19 after the company reported below consensus revenue and lowered its sales outlook. Through the lens of technical analysis Tuesday’s price action qualifies as a so-called ‘bearish reversal,’ which is to say that HD stock may have lower to go in coming days and weeks.
Investors kept the bid in HD stock into its recent earnings report. Despite Tuesday’s pullback HD stock remains higher by about 31% year-to-date. In other words, even just a routine mean-reversion pullback in the stock could have further to go than just the 5% of Tuesday’s selling.
HD Stock Charts
As always, for perspective let us look at the longer-term trends of the stock in question. Here we see that HD stock in 2019 has essentially worked its way from the lower end of long-standing trading to the upper end of the range.
While it is always possible that a stock overshoots its ranges, all else being equal, this longer-term chart points the stock toward a mean-reversion or at least a consolidation phase. From a momentum perspective, the weekly MACD momentum oscillator at the bottom of the chart is currently also at ‘overbought’ levels last seen in January 2018, after which the stock tumbled for the ensuing weeks in a healthy and important mean-reversion move.
Moving on to the daily chart we see that HD stock in the first half of September had reached the upper end of its year-to-date channel as marked by the red parallels. The stock then gyrated in a sideways pattern until yesterday’s earnings report.
The selling on Tuesday came on a down-gap at the beginning of the trading day and saw the stock keep the selling pressure so much so that it closed at the lows of the day. While the stock could bounce a little in coming days, typically this type of setup sees the stock undergo another wave of selling.
A next downside target for HD stock is in the $220 area, followed by a possible and much deeper pullback toward the $200 area.
Active traders and investors could look to either short HD stock, respecting any strong bullish reversal on a daily closing basis as a stop loss. Alternatively, options traders could consider buying a January (monthly expiration options) $225-$215 bear put spread.
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