Home Depot Stock May Complete Long-Term Top

Dow component The Home Depot, Inc. (HD) is struggling despite the first quarter's upbeat price action, hit by heavy selling pressure after this week's fourth quarter earnings release. The stock has been testing 200-day exponential moving average (EMA) support for the past four weeks and could break down soon, exposing a decline that tests 2018's 52-week low in the $150s. In turn, that may signal the final phase of a long-term top that ends the stock's multi-year bull run.

The company beat profit estimates by nine cents and reported in-line revenues on Tuesday, but weak full-year earnings guidance prompted a sell-the-news reaction, with market players worried that slowing home sales will undermine growth. Relatively strong metrics from rival Lowe's Companies, Inc. (LOW) on Wednesday failed to ease those fears, triggering a 2% slide for Home Depot shares that has brought the weekly lows back into play.

HD Long-Term Chart (1985 – 2019)

The stock turned higher at 23 cents in 1985, entering a powerful uptrend that prompted six stock splits into the 1992 high at $11.45. It paused around that level for more than four years and took off in a fresh advance that added three additional splits before topping out at $69.75 on the last trading day of 1999. That marked the highest high for the next 13 years, ahead of multi-wave downturn after the internet bubble burst in 2000.

Selling pressure ended at a five-year low near $20 in February 2003, giving way to a proportional bounce that stalled in the mid-$40s in 2004. Price action completed a head and shoulders breakdown in 2007, generating a downtrend that accelerated during the 2008 economic collapse. The decline posted an 11-year low during the October crash and tested that level successfully in March 2009, completing a double bottom reversal that yielded modest upside into 2010.

Buyers returned in 2012, triggering a rapid advance into the 1999 high, followed by a 2014 breakout that generated healthy returns into the January 2018 high at $208. A pullback to $170 attracted dip buyers, yielding a bounce that exceeded the prior high by six points in September, ahead of a downturn that failed the breakout. The stock broke range support in December, posting a 15-month low, followed by a first quarter uptick that ended in the $190s this week.

The monthly stochastics oscillator crossed into a buy cycle last month after failing to pierce the oversold level. It dropped in two waves into that level, raising doubts about the most recent upturn because complex indicator waves frequently print three waves, up or down. A rally above the weekly high at $193.42 would ease those concerns while lifting the indicator toward the panel's midpoint.

HD Short-Term Chart (2015 – 2019)

The 2018 decline broke the 200-day EMA in October, while November and January bounces failed to remount new resistance. The uptick into February succeeded, but momentum then died, yielding a month of testing at new support. The stock is trading at the moving average this morning, with a potential bounce setting off a short-term buy signal, while a breakdown would set off an intermediate sell signal.

The on-balance volume (OBV) accumulation-distribution indicator has dropped to an 18-month low even though the stock is trading in the middle of the multi-year trading range. This marks a bearish divergence that reveals an aggressive exit by institutional capital focused on the cyclical housing sector. OBV is now situated lower than the December low, raising the potential for a rapid decline into that price zone.

A downturn into the lower red line would now complete a bearish head and shoulders pattern, even if the current recovery wave fails to print a right shoulder at the upper red line. This is ominous because last decade's uptrend into 2007 ended with a head and shoulders breakdown. However, there's no urgency to rush for the exits at this time because the stock is still trading 30 points above the neckline.

The Bottom Line

Home Depot stock may be carving the final stages of a long-term topping pattern that ends the 10-year uptrend.

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