Sell the 14% Rally in Home Depot Stock

Bear put spreads are worth a shot

The long-awaited and desperately needed rebound has arrived for equities. Home Depot (NYSE:HD) capitalized on the return of risk-taking by attracting scores of buyers and notching its second-largest accumulation day of the entire crisis.

Source: Northfoto / Shutterstock.com

As epic as today’s 14% moonshot was, however, I think there’s still more pain ahead for HD stock. Let’s look at how I’d trade the home construction giant right now.

Home Destruction

The destruction wrought in airline and cruise stocks has been well covered on financial media sites across the web. Their exposure to the coronavirus fallout is obvious. But they aren’t the only industries seeing widespread liquidation in their stocks.

Housing-related companies are getting smashed by sellers as well. Take the Homebuilders ETF (NYSEARCA:XHB) and Home Construction ETF (NYSEARCA:ITB), for example. At Monday’s lows, they were both down 51% and 54%, respectively. Comparatively, the S&P 500‘s 36% whack doesn’t seem nearly as bad.

Source: The thinkorswim® platform from TD Ameritrade

The relative weakness plaguing both ETFs speaks to the challenging backdrop for investing in Home Depot right now. With the probability of a recession and rampant unemployment on the rise, investor sentiment for housing-related equities is souring.

The bullish pull of low mortgage rates is losing ground to the bearish pull of an economic downturn. And if the price action in HD stock is any indication, investors have already declared bears the tug-of-war victor.

I see little reason to question their conclusion.

HD Stock Charts

Source: The thinkorswim® platform from TD Ameritrade

Print out the weekly chart of Home Depot and stick it on your fridge, because you’re unlikely to see super-sized candles like those of the last three weeks very often.

Credit goes to buyers for completely engulfing last week’s bloodbath candle with this week’s rousing rip. But, let’s not be hasty. It’s only Wednesday and we need to see if bulls can maintain their gains for the remainder of the week.

Even if they do, caution warrants viewing the rebound with skepticism. The overall trend still points lower, and multiple resistance zones await overhead. Tack on the nasty looking industry ETFs and I’d rather bet on the bounce fading than wager that this morphs into a glorious V-shaped reversal that takes Home Depot back up to February’s levels.

Source: The thinkorswim® platform from TD Ameritrade

With HD now almost $50 off the lows, the easy part of the oversold bounce is done. While we could see further gains, old support near $190 and $200 — not to mention the declining 20-day moving average — lie in wait to potentially thwart the retracement.

If you’re long Home Depot shares, I suggest using the strength to your advantage by selling covered calls or buying out-of-the-money bear put spreads. You can capture a lot more premium on calls and puts are now a great deal cheaper.

For traders looking to speculate, I like buying April put spreads to bank on the next descent.

The Trade: Buy the April $170/$160 for $3 or less.

As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. For a free trial to the best trading community on the planet and Tyler’s current home, click here!


Article printed from InvestorPlace Media, https://investorplace.com/2020/03/sell-the-14-rally-in-hd-stock/.

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