Home improvement giant The Home Depot, Inc. (HD) reported an earnings miss before the opening bell on May 19. The stock gapped lower on this news after setting its all-time intraday high of $248.31 on May 18. The stock then stabilized above its semiannual pivot at $226.94.

At the high, this component of the Dow Jones Industrial Average stayed shy of its annual risky level at $249.87, which is a warning. The stock ended last week at $241.88, up 10.8% year to date and in bull market territory at 72% above its March 18 low of $140.63. Home Depot stock is just 2.6% below its all-time high of $248.31 set on May 18.

Fundamentally, the stock is not cheap, as its P/E ratio is 23.94 with a dividend yield of 2.49%, according to Macrotrends. Selling pressure was caused by concerns that consumer spending will be slow as the coronavirus continues to spread. In my home state in Florida, cases rose to a new high on May 23 at 50,127.

The daily chart for Home Depot

Daily chart showing the share price performance of The Home Depot, Inc. (HD)
Refinitiv XENITH

Home Depot stock had been benefiting from a golden cross that was confirmed on April 12, 2019. This buy signal occurred when the 50-day simple moving average rose above the 200-day simple moving average to indicate that higher prices would follow. When above a golden cross, the strategy is to buy weakness to the 200-day simple moving average. This buying opportunity last occurred on Dec. 16, when the average was $211.92.

Home Depot stock traded as high as $247.36 on Feb. 21 and then cascaded lower to $140.63 on March 18. During this crash, the stock failed to hold its semiannual pivot at $226.94 on March 10. The 200-day simple moving average gave way on March 11.

After the March 18 low of $140.83, there was a V-shaped bottom. By April 27, the stock tested its 200-day simple moving average at $219.88. The quarterly pivot at $221.26 was passed to the upside on May 4.

The semiannual pivot at $226.94 became a magnet between May 5 and May 14. Then came the spike up to the May 18 high of $248.31. This high was shy of the annual risky level at $249.87.

The weekly chart for Home Depot

Weekly chart showing the share price performance of The Home Depot, Inc. (HD)
Refinitiv XENITH

The weekly chart for Home Depot is positive, with the stock above its five-week modified moving average at $222.93. The stock is also above its 200-week simple moving average, or "reversion to the mean," at $181.52. Its 12 x 3 x 3 weekly slow stochastic reading rose to 77.35 last week, up from 70.24 on May 15. 

Trading strategy: Buy Home Depot stock on weakness to its semiannual and quarterly pivots at $226.94 and $221.26, respectively, and reduce holdings on strength to its annual risky level at $249.87.

How to use my value levels and risky levels: The stock's closing price on Dec. 31, 2019, was an input to my proprietary analytics. Semiannual and annual levels remain on the charts. Each calculation uses the last nine closes in these time horizons.

The second quarter 2020 level was established based upon the March 31 close, and the monthly level for May was established based upon the April 30 close. New weekly levels are calculated after the end of each week, while new quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year, and annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an "inflating parabolic bubble" formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered as being "too cheap to ignore," which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.