Home Depot: Buy The Pullback And Wait For The Break Out

|
About: Home Depot, Inc. (HD)
by: Marshall Thomas
Summary

Natural disaster play a bit overcooked in the short term with price bouncing off resistance at $160 and a doji pattern showing bears taking away upward momentum.

Support around $150 will provide a good buying opportunity over the next few weeks.

Price will head to $175 over the next 3-9 months.

The recent stint of back to back hard-hitting hurricanes affecting the south and southeastern portion of the US have prompted many to buy Home Depot stock as the media has touted the empty shelves of many HD locations in these areas, which traders interpret to be higher than expected revenues and profits in their next financials. These natural disasters have run up the stock price by about 6% the past couple weeks, and while we have to wait to see their Q3 financials, I took the opportunity to check the charts and see if this recent HD natural disaster play was a legitimate run up, or just a media induced buying spree.

(Chart 1 - 11Y/1M)

(Source: TD Ameritrade, for illustrative purposes only)

Taking a step back and looking at price action since 2006, we can see the healthy bull run that HD has been riding since the financial crisis, with its stock rising over 800% in that 10 year period. The relative strength of HD is indicated below volume, and I've drawn in an upward black trendline showing the relative outperformance of HD when compared to other S&P 500 stocks. The price action has been well supported by the upward trendline as well which I've drawn, visually confirming the trend. For long term investors, the charts are supporting higher prices to come for HD. We have yet to see a breakdown of this long term upward trend, so until we see price break and close below that long term trend line (around $135 currently), the odds are supporting a continuation of the upward trend.

The Fibonacci extension lines are drawn in as well, using the bottom in the beginning of 2009 and extending to the relative highs we saw in 2014. From that point we extend the Fibonacci lines to get price targets and levels of support and resistance. Most recently, HD found resistance at the $135 and $150 level, and now is pushing towards the $165 target - which I would expect it to hit in the short term (next 3 months). In the intermediate term (next 3-9 months) I think we'll see HD push to that $175 level, which corresponds to a key Fibonacci extension level.

(Chart 2 - 3Y/1W)

(Source: TD Ameritrade, for illustrative purposes only)

Looking at the last three years of price action, we can see relative tops where resistance was met at $135, $145 and currently at $160. Since February of this year, HD has been range bound between $145 - $160, so I'll be looking for the next event that forces HD out of this range. The last two weeks of hurricanes pushed prices to the upward bound of this range, but the most recent candle is a doji which resembles a plus sign, and indicates a tug of war between the bulls and bears, or market indecisiveness. I've highlighted these two candles, along with their volume bars, showing that volume has been some of the strongest we've seen in the past couple years, with many traders participating in the natural disaster play. The doji is a bit of a warning sign for me in the short term, especially given the high volume that traded that week. This is a sign that traders think the natural disaster play is overcooked, and bears have succeeded in fending off the bulls from breaking through that $160 level. In the short term (less than 3 months), I think we see a bounce off the resistance level of $160 and price falls back into the channel. The next few weeks may provide a good opportunity to acquire some of HD stock at relatively cheaper levels.

The RSI indicator is shown below volume and you can see the indicator has been flirting with heading into oversold territory throughout July and August (the 50 level shown with dotted pink mid-line), which also corresponded with price bouncing off the lower bound of the channel at $145. If we see price head downward over the next couple of weeks, I would expect RSI to fall back down to around that 50 level, where I would be a buyer (expect price to be around $150 if the 50 level is reached).

Bollinger Bands are shown surrounding price, where the 20 week SMA is the middle line, and the outer bands represent two standard deviations away from that center line. I like to use this to spot breakouts, which you can see occurred in the past few years with HD. When price breaks and closes above or below one of the outer bands, it often leads to further price action in the direction of the break out. We saw a strong move to the edge of the Bollinger Band last week, but not a close above, and the doji candle immediately following that move means we'll probably see more price action in the defined trading range. This range can also be confirmed with the 20 day SMA flattening at $153, right in the middle of the channel, which would be another way of confirming the current trendless period.

(Chart 3 - 1Y/1D)

(Source: TD Ameritrade, for illustrative purposes only)

Looking at the daily price action over the past year, we can get a bit more precise with price movement. I've drawn in a black upward trendline that has supported price since July. The dotted blue line is a previous level of support, and I think is where price will likely find support next. This also nicely lines up with the support from the black trendline at the $150 level. I've got quite a few simple moving averages overlaid on price, most of which are bunched together due to the trading range, but the 200 day lies beneath at $147, where price will find support as well.

On Balance Volume is shown beneath volume, and we look to this indictor to see if price is supported by volume, which would indicate a strong, supported move. We see that volume supported price in the upward trend earlier over the past year, and is currently trending upward again. This could indicate that we are nearing an upward breakout out of the channel we are currently trading in, although as mentioned earlier I would expect a pullback before an upward break out.

I have the RSI shown below On Balance Volume, and circled the last two relative lows here, which were in oversold territory and were good buying opportunities. I think we will see a downward move in price over the next couple weeks that should push RSI to around 50, providing a good buying opportunity before the next breakout.

Starting in the short term, I think we will see a pull back from the top of the channel to around the $150 level as traders sell the natural disaster play, then we will see price action within the channel until a fundamental event pushes price to the next level. The odds are favoring an upward breakout and continuation of the long term bullish trend. Going into the intermediate term, I think we will see price reach the $165 level, and then make a push to $175.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: TD Ameritrade and Marshall Thomas are separate unaffiliated and are not responsible for each other's services or policies. All images above (unless otherwise noted) © 2017 TD Ameritrade. Used with permission. For illustrative purposes only.