Dow component The Home Depot, Inc. (HD) is trading sharply higher on Tuesday morning after beating first-quarter estimates by 6-cents while raising fiscal year 2018 guidance. The positive results add to the retailer’s broad market leadership while reaffirming a strong U.S. housing market. It also confirms the apparent immunity of a handful of retail segments to the broad exodus out of brick and mortar storefronts into e-commerce sales.

The stock has performed well throughout this bull market cycle, empowered by a massive do-it-yourself phenomenon following broad wealth destruction in the 2008 economic collapse. The sale of older homes continues to grow despite limited inventory, making it likely this beneficial trend will continue into the end of the decade. Rival Lowe's Companies, Inc. (LOW) has displayed equal strength in recent years, raising odds it will also report a strong quarter on May 24.

Despite post news euphoria, it could be dangerous to jump in right here because the stock has rallied nearly 20% in 2017 and is getting close to long-term resistance that could generate a sizable correction. As a result, market players may wish to stand aside and wait for a mid-year decline that works off overbought technicals and drops price into more reasonable buying territory.

HD Long-Term Chart (1993–2017)

HD

The stock took off in a strong uptrend after the 1987 crash, lifting from 40-cents (post eight stock splits) into the 1993 high at $11.45. It underperformed for the next four years, running in place ahead of a 1997 breakout that caught fire into the 2000 top at $69.75. The Dot.com bear market took its toll, generating a substantial decline that continued into the 2003 low at 20.18, ahead of a recovery wave that stalled in the lower half of the 3-year selloff range in 2004.

Another decline set into motion in 2007, picking up steam during the 2008 economic collapse. The stock broke the 2003 low before finding support at an 11-year low in the mid-teens while a 2009 bounce stalled in the mid-30s in 2010. Bears held firm control into a 2012 rally that reached the prior decade’s high in the first quarter of 2013. It broke out immediately, but momentum failed to develop until an August 2014 breakaway gap generated a powerful uptrend that’s still in progress nearly three years later.

Major resistance has developed along a trendline of rising highs (blue line) since the 2013 breakout, ending rallies in 2015 and 2016. The buying wave that started in November 2016 has lifted within 3-points of resistance (red line), predicting the stock will post limited upside in coming weeks. Given that barrier, it makes sense to stand aside for now and wait for more advantageous reward: risk.

HD Short-Term Chart (2015–2017)

HD

Price rate of change eased in the first quarter of 2015 while the August mini flash crash added a high dose of volatility that generated a series of reversals in the mid-130s in 2016. The stock cleared that resistance level following the presidential election and took off in a vertical rally that’s approaching the rising highs trendline once again. It’s trading at $159 in early action following quarterly results and may be headed straight into that barrier.

On Balance Volume (OBV) reveals hidden vulnerability, failing to mount the 2016 high into the second quarter of 2017. This bearish divergence sets the stage of a sizable reversal that could test the green line in coming months. At a minimum, it advises patience while price action absorbs the bullish report and we find out how much fresh capital is willing to commit at these lofty levels.

The Bottom Line

Home Depot has reached an all-time high following a strong earnings report, but the rally is quickly approaching major resistance going back to 2013. That obstruction could trigger a mid-year correction that tests new support in the 130s.

<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>

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