Home Depot Stock Near All-Time High Ahead of Earnings

Dow component The Home Depot, Inc. (HD) reports fourth quarter 2019 earnings in Tuesday's pre-market session, with Wall Street analysts expecting earnings per share (EPS) of $2.11 on revenue of $25.8 billion. Market players will be watching results closely after the home improvement giant missed third quarter revenues and lowered fiscal year 2020 guidance in November, triggering a three-week 12% slide to a four-month low.

Selling pressure ended when the company affirmed 2020 guidance in mid-December, projecting 1.8% year-over-year revenue growth to $110 billion. The subsequent recovery wave reached October's bull market high in January, yielding a February breakout that posted an all-time high at $247.36 on Friday. The stock is trading just three points lower on Monday morning, which isn't too bad with the S&P 500 trading 3% lower.

The channeled uptrend since December has lifted weekly relative strength into the overbought zone, but monthly measurements are positioned within mid-range levels, predicting that bulls should prevail if a sell-the-news reaction hits the stock after this week's confessional. However, there's little to be gained by chasing a post-news rally at this point, with major benchmarks spiraling to lower ground as a result of the expanding coronavirus outbreak.

The lowest-risk entry for the conservative market player may come with a failed breakout above the 2019 high at $239, followed by a decline that finds support at the 50-day exponential moving average (EMA) near $232. However, continued downside will set off secondary sell signals that could presage a trip into the 200-day EMA at $220. That selling wave would make the broad pattern look less bullish and more like the start of a larger-scale downtrend. 

HD Long-Term Chart (1990 – 2020)

The stock split six times between 1987 and 1993, highlighting rapid growth as mega-stores grabbed enormous market share from mom and pop retailers. It topped out at $11.45 after the last split, entering a narrow range, ahead of a 1997 breakout that reached $69.75 at the turn of the millennium. That marked the highest high for the next 13 years, ahead of a bear market impulse that dropped the stock more than 70% into the January 2003 low at $20.10.

A bounce into the end of 2004 stalled at the 50% sell-off retracement, marking resistance that held through 2005, 2006, and 2007 breakout attempts. The decline during the economic collapse undercut the 2003 low by three points, posting a low that finally ended the eight-year downtrend. The subsequent recovery wave finally completed a round trip into the prior high in 2013, yielding a 2014 breakout that generated impressive gains into the February 2018 high at $207.60.

A third quarter breakout attempt failed, while a fourth quarter swoon posted a 52-week low in the $150s in December. That marked an excellent buying opportunity, ahead of a bounce that completed a round trip into the 2018 high in July 2018. The stock broke out in August, while the decline into December confirmed support at the breakout level, setting the stage for the 2020 rally to new highs.

HD Short-Term Outlook

Price action since September 2018 has carved a rising wedge that is considered bearish because support is so close to resistance, allowing relatively minor pullbacks to set off major sell signals. The rally into February has reversed at wedge resistance, reinforcing this pattern, while a decline through the $220s will set off a fresh batch of sell signals. This level is loosely aligned with the 200-day EMA, highlighting the perfect level to watch if sellers take control after earnings.

The Bottom Line

Home Depot stock needs to hold the $220s in order to maintain its bullish trajectory and post new highs.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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