Dow component The Home Depot Inc. (HD) rallied strongly into the second-half of 2015 but has underperformed broad benchmarks since momentum stalled in November of that year, giving way to a rising wedge pattern that’s picked the pockets of long-term shareholders. The malaise matches similar action in the homebuilding sector, which has run in place in reaction to positive but unexciting monthly sales data.

February 21st earnings will likely reinforce the status quo while bullish talking heads draw a fresh wave of capital off the sidelines. That would match breathless reporting whenever this stock notches a new high, even though breakout attempts since 2015 have all attracted equally vigorous selling pressure. To illustrate, the stock is now trading just five points above the 2015 high.

HD Long-Term Chart (1993–2017)

HD

It turned sharply higher in the 1980s and maintained its upward trajectory into 1993 when it topped out at $11.45 (post four stock splits). Sideways action into 1997 yielded a powerful breakout that lifted price to $64 on the last day of the old millennium. It topped out at that level, testing range resistance in April 2000 and selling off in a persistent downtrend that continued into the first quarter of 2013 when it bottomed out at a 5-year low just above $20.

A bounce into 2004 failed at the 50% selloff retracement, yielding three years of testing at that level, ahead of a 2008 decline that accelerated during the economic collapse. The stock broke the 2003 low and bottomed out at $18.02 in October but continued to test new support for five months, finally pounding out a double bottom reversal. The subsequent recovery wave stalled at the .618 Fibonacci selloff retracement level in 2010, requiring another two years to complete a round trip into the 2007 high.

It broke out in 2012, entering the most productive period since the 1990s, gaining ground at a rapid pace into resistance at the 2000 high. It rallied above that level in 2013, based on new support for three months and took off in an uptrend that matched the intensity of the prior advance. Low volatility surged in August 2015 when the mini flash crash triggered a 28-point one day decline. The stock recovered quickly, but the bungee jump presaged a November reversal that marked the first leg of the profit-killing wedge and its endless series of slightly higher highs.

HD Short-Term Chart (2014–2017)

HD

The August plunge posted the first low in the rising wedge (red line), but high volatility exceeded the subsequent trendline. Price action after the event signaled a major change in character, yielding a quick rally to a new high, followed by a deep slide that retraced more than half of the prior uptick. The V-shaped bounce into May 2016 then attracted a large breakout crowd that got trapped in a swift decline, carving the next leg in the bearish pattern.

On Balance Volume (OBV) has issued the most reliable buy and sell signals in the last year and a half, topping out in November 2015 and entering an aggressive distribution wave that posted a lower high each time that price has posted a nominally higher high. The indicator settled into a flatline in the second half of 2016 and has failed to budge, even though the price has posted two slightly higher highs. This signals a major bearish divergence, predicting a long-term top rather than new uptrend.

The Bottom Line

Home Depot has pushed against rally highs for more than a year but failed to make significant progress and is now trading just a few points above the 2015 peak. Shareholders have steadily abandoned positions throughout this period, making a long-term top more likely than a breakout and trend advance.

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

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