Bulls Back in Charge of Home Depot Stock

Dow component The Home Depot, Inc. (HD) reports first quarter 2020 earnings on Tuesday, May 19, with analysts looking for earnings per share (EPS) of $2.26 on $27.5 billion in revenue. The stock sold off after testing the bull market high in reaction to February's fourth quarter 2019 report, with shareholders hitting the exits after the company lowered annual guidance. The bottom dropped out less than two weeks later, with a 42% decline into mid-March.

The home improvement giant has cut hours in order to restock shelves and perform cleaning services during the coronavirus pandemic. It has received two Wall Street upgrades and one downgrade since the last earnings report, with bullish analysts expecting a rapid recovery. However, the loss of over 20 million jobs has generated an instant housing crisis, with furloughed workers forced to cut back on plans to buy a home or renovate an existing property.

The stock bounced strongly off the March low, retracing more than 90% of the distance back to the 2020 high, with investors viewing the company as a potential winner during a recessionary period. Accumulation has nearly matched positive price action, setting up supportive conditions for an eventual breakout above resistance. However, it hasn't posted a single higher low in the past two months, predicting a multi-week pullback prior to a sustained uptrend. 

HD Long-Term Chart (2000 – 2020)

A powerful uptrend posted an incredible nine stock splits between 1987 and 1999, with rapid growth underpinned by the paradigm shift away from small hardware stores into big box home improvement centers. The advance finally topped out at $70.00 in April 2000, marking the highest high for the next 13 years, ahead of a complex decline that carved a series of lower highs and lower lows into February 2003's five-year low at $20.10.

A modest recovery wave stalled near the 50% sell-off retracement level in 2004, while three breakout attempts into 2007 failed, yielding renewed downside that accelerated during the 2008 economic collapse. The vertical downdraft undercut the 2003 low by three points before finding support, posting an 11-year low ahead of a choppy uptick that took more than three years to complete a round trip into the prior high.

A 2012 breakout ended in the low $80s in 2013, yielding a triangular basing pattern, followed by a secondary breakout in the third quarter of 2014. The stock posted steady gains into January 2018 and stalled once again, with trade war headwinds affecting broad sentiment. It finally cleared resistance in August 2019, carving a shallow uptick that posted an all-time high at $247.36 in February 2020, just three days before the fourth quarter earnings report.

HD Short-Term Chart (2017 – 2020)

The decline into March violated deep support at the 50-month exponential moving average (EMA) before remounting that level at month's end. This constructive price action established a monthly stochastic buy cycle that's accelerating less than one week before the first quarter report. The uptick has also mounted the .786 Fibonacci sell-off retracement level, marking the final barrier ahead of a round trip into the bull market high. However, the narrowly aligned 50- and 200-day EMAs look like magnet targets during a pullback, suggesting that the $210 to $215 zone will offer a low-risk buying opportunity.

The on-balance volume (OBV) accumulation-distribution indicator posted a new high in January 2018 and entered a distribution phase, ahead of failed breakout attempts in June and September. OBV finally cleared that barrier in December 2019 and held new support through the first quarter decline. It hasn't reached the prior high during the bounce into mid-May but is well positioned to withstand a multi-week downturn before turning higher with advancing price.

The Bottom Line

Home Depot stock has nearly recovered from the first quarter rout and could break out to a bull market high in coming months.

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