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Home Depot Long-side Setup

Posted by Serge 15 Jun 2011, 10:14 am No Comments »

 

Fundamentally speaking I hear that Home Depot and Lowe’s stores are jam packed as folks are dong up their homes.  It’s not clear what the reasons are for the sudden home improvement spurt.   Is it a) people doing up their homes because they feel better about their financial future and hence a positive sign for the economy, or is it b) home improvement to sell the homes.  For Home Depot's stock at the moment it's almost irrelevant as more demand is good either way.  

More recently difficult spring weather has had its impact on the stock price as it is off approximately 10% from the sell signal on May 17th.  The miserable pending home sales number that came out on May 27th (-11.6% vs -1.4% consensus) certainly didn’t help the price of Home Depot’s stock.  

My currently bullish view on HD has its roots in the monthly chart.

A little perspective goes a long way; looking at a chart dating back to 1999 one can clearly see the downtrend during the decade, from 2000 to 2010.  More importantly, in January of this year HD broke higher and out of this decade long downtrend and is currently re-testing the downtrend line from the upside.  Let’s zoom in closer.

 

From January through May the stock several times bumped into a major resistance zone between $38 and $39.50 and finally after trying it one last time on May 17th gave a clear doji sell signal that over the ensuing several weeks took the stock below its 50 day and 200 day moving averages.

 

Yesterday HD completed a so called Star and gap formation, which is a derivative of the morning star candlestick formation.  If you are not familiar with candlestick analysis, let me explain.  This three-day formation shows a fairly violent sell-off at the bottom of a trend, followed by an indecision day and at last a gap up and breakaway on the last day.  Sellers lost their strength and after an indecision day buyers took the chance to step. 

Of course after the roughly 10% sell-off since mid May some backing and filling would be expected, and HD still trades fairly close to its 200 sma.  Nonetheless, a trade to the upside here does setup with stops at Monday’s low near $33.40 and an ultimate upside price target of the May 17th high near $38.

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