Lower Lows in Home Depot (HD)

There's still room to give bulls benefit of the doubt, but many signs point to a reversal

By Serge Berger, InvestorPlace Chief Technical Analyst


Hi everyone, it’s Serge from The Steady Trader. The stock I’m going to talk about today is Home Depot (HD), and specifically what potentially yesterday’s Wednesday, August 14, price action meant, or potentially means going forward.

To give you a little perspective first of all, if we peel back the chart all the way back to the August 2011 lows, and we draw a very simple uptrend line, note that more or less we are still quite a bit above that area, and a break  below there would be the more meaningful cautionary flag to raise. Right now that’s not yet the case but what I’m sensing is that a test of this uptrending line is fairly imminent.

Another way of looking at this is that the stock is getting pretty close to touching the 100-day moving average. When I say pretty close,  it has a little over a dollar left to go. But if you peel back the chart again,  note that the 50-day moving average, the yellow one, has been fairly useless for the medium term trend. It’s given us a few good defined areas of support and resistance in the immediate term, but through the medium term lens, the 100 day moving average, which is the blue line, has served as much better support.  So if and when this blue line breaks, which is around $76.25, that would probably be the cost and acceleration to the downside in the stock and probably also push it below the uptrend line that I showed you that dated back to 2011.

If I now flip back to a plain white chart of HD, the reason I think we now have a better chance of actually correcting a little bit better than say anytime this year, really it would have to do with the fact that we’ve developed a pretty good double top here. So I’m going to zoom in a little bit. Note that the top here on May 22, which also served as an intermediate-term top in the broader equity market and also in the S&P 500 and other areas that has now been well overcome. But in HD there was also a shooting star candle and that has held on an intraday basis as resistance. So when we came back up here in mid-July and attempted a retest of the May 22 highs, we ultimately failed and the stock of course consolidated sideways, and yesterday gave us a more meaningful lower low.

It’s important to know that long trends like we’re seeing in HD don’t change for the medium term over a matter of a couple days. It really takes some time for them to develop. So from that point of view we have pretty clear resistance up here. We also have — for the bulls here — still benefit of the doubt, a bull flag. But if it were to break, anything meaningful below yesterday’s low, somewhere near 1720 on a daily closing basis, would probably get us towards the 100-day moving average ($76.25) and below that would probably violate most trendlines. Right now though, I’m focusing on lateral support, which as of yesterday has been broken, and that level I was looking for to break on a daily basis was about $78.20. And of course yesterday’s close at $77.44 certainly qualifies as a lower low at the top after a consolidation period. From this point of view, that is a bearish setup.

Hope this makes sense, and take care.

Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free Weekly Market Outlook Video here.

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