Chart of the Day: Could Home Depot Rally to $400 as Consumers Stay Home?

11/22/2022

2 minutes read

2022.11.22 08:25

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Home Depot (NYSE:) rose yesterday by 1.15% to a three-month high. The , where the stock is listed, declined 0.13% despite the fact the home improvement retailer accounts for 6.2% of the index.

Perhaps that’s why, with less than its 1% weight of the , that gauge dropped 0.39%.

Finally, and the most glaring positive divergence. The sector—which includes Home Depot—plunged 1.45%, underperforming the other S&P 500 sectors.

The retailer posted better-than-expected third-quarter last week with EPS of $4.24 and revenue of $38.87 billion compared to expectations of $4.12 EPS and $37.92 billion in revenue.

There are several reasons that home improvement remains resilient despite a decline in the housing market.

Consumers are increasing their time at home
Consumers find better bargains during a recession
Job loss increases time at home
Consumers renovate rather than move in a recession

Harvard University research found that between 1987 and 2007, remodeling lagged homebuilding by several quarters.

Analysis indicates that the home improvement market is expected to grow. Now, let’s see how these market conditions translate into market forces.

Home Depot Daily

Yesterday’s advance provided an upside breakout of a pennant, bullish after the 10.5% surge within three days, 8% of which was when data on Nov. 10 showed easing inflation, as the price crossed above the 200 daily moving average (DMA), which suppressed the price on Aug. 16. The price climbed above the 200 DMA for the first time since March 2020. The price rallied 75% until May 7, 2022. Also, the 50 DMA overcame the 100 DMA and now both are rising. This moving average interplay demonstrates a trend that is gaining hold in a broad range of measures.

Target

The pennant is a continuation pattern as the same interests that helped create it will statistically repeat the move after it is completed because of unwinding, triggered positions and psychology.

An aggressive trader may measure the initial move from the Nov. 4 low, given that the price dropped again on Nov. 9.

A conservative interpretation will argue that the move since Nov. 4 was not a wind-up of positions and expectations. Therefore, a prudent measure would start at the Nov. 9 low, from where the price added 31.42 points in a straight line till Nov. 11. Adding that score to the $314.45 breakout point targets $345.84.

However, Aug. 16 may provide resistance, as traders remember the bearish stronghold’s 66% plunge in the following six weeks. If it does make a new high, the stock will have completed a much larger, double-top pattern, targeting $400.

But be careful. The breakout was weak, producing a high wave candle, denoting confusion and fear, and there was low volume. Traders may want to wait for confirmation.

Trading Strategies – Long Position

Conservative traders should wait for the price to provide a solid green line on high volume and wait at least for three days (preferably including a Friday), during which the price remains above the pennant. Then, they should wait for a return move to confirm pattern integrity.

Moderate traders would wait for a long green candle or an advance accompanied by high volume and another close, then wait for a pullback for a better entry.

Aggressive traders could wait for a solid green candle or gains supported by rising volume.

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