Heavy Foot Traffic Bodes Well for Home Depot (HD) Quarter

The Wall Street Journal just set a positive tone for The Home Depot, Inc.'s (HD) second quarter 2020 earnings release on Tuesday, reporting that daily foot traffic at the retail giant is 35% higher than the same period in 2019. The informal metrics add to growing evidence that social distancing and self-quarantines have had a beneficial effect on the do-it-yourself home improvement industry, with customers having lots more time to upgrade kitchens, paint ceilings, and install new closets.

Key Takeaways

  • Home Depot foot traffic has risen well above 2019 levels, according to The Wall Street Journal.
  • The stock broke out above major resistance at $260 in July.
  • A lack of visibility has undermined Home Depot analyst rankings.

Analysts are looking for Home Depot to post a quarterly profit of $3.38 per share on $32.13 billion in revenue. The stock sold off after the company missed first quarter estimates and suspended 2020 guidance in May, with market players skeptical that reopening efforts would be successful. It recovered in the next session and broke out in July, posting a healthy string of all-time highs, and has now hit overbought readings that have triggered a number of past downturns.

Wall Street consensus is mixed compared to the retailer's big-cap peers, with a "Moderate Buy" rating based upon 15 "Buy," 8 "Hold," and 0 "Sell" recommendations. The lack of guidance in May and few quarterly updates may have generated excessive pessimism that could be relieved during the upcoming release. Price targets currently range from a low of $221 to a Street-high $306, while the stock is trading right on the median $280 target.

Overbought is a term used when a security is believed to be trading at a level currently above its intrinsic or fair value. Overbought generally describes recent or short-term movement in the price of the security and reflects an expectation that the market will correct the price in the near future.

Home Depot Long-Term Chart (2009 – 2020)

Long-term chart showing the share price performance of The Home Depot, Inc. (HD

Home Depot stock ended a nine-year downtrend in the mid-teens in 2009 and turned higher into the new decade, completing a round trip into the 2000 high at $70 in the first quarter of 2013. A breakout made little headway until the second half of 2014, when the stock took off in a powerful advance that lifted the retailer into market leadership. The uptrend stalled in the first quarter of 2018 and eased into a volatile broadening formation, better known as a megaphone pattern.

Price action hit a lower low in December, ahead of a rapid recovery that posted a new high near $240 in September 2019. A nominally higher high in February 2020 got sold aggressively, dropping the stock to the lowest low since March 2017. It reversed once again into the second quarter, reaching megaphone resistance in June. It cleared that barrier in July and has added another 30 points into August.

A broadening formation is a chart pattern characterized by increasing volatility and diagrammed as two diverging trendlines – one rising and one falling. It usually occurs after a significant rise or fall in the action of security prices. It is identified on a chart by a series of higher pivot highs and lower pivot lows.

Home Depot Short-Term Chart (2018 – 2020)

Short-term chart showing the share price performance of The Home Depot, Inc. (HD

The on-balance volume (OBV) accumulation-distribution indicator topped out in January 2018 and entered a distribution phase that ended at an 18-month low in February 2019. It broke out at year end and posted new highs in February, May, and August, in sync with bullish price action. Overbought technical readings pose the biggest threat given this tailwind, with a multi-week pullback offering a potential low-risk buying opportunity.

The stock consolidated at megaphone resistance and broke out in the third quarter, minimizing a bearish technical scenario. The 50-day exponential moving average (EMA) has now risen into alignment with new breakout support at $260, marking a price level that should bring committed buyers off the sidelines. Just keep in mind that the flip side to this equation isn't pretty because a failed breakout would reinstate the volatile pattern, exposing a deep slide through the March low.

The Bottom Line

Bullish Home Depot foot traffic could presage stronger-than-expected second quarter 2020 earnings in Tuesday's pre-market.

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

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