Home Depot on the Defensive Ahead of Earnings

Dow component The Home Depot, Inc. (HD) reports earnings in Tuesday's pre-market session, with Wall Street analysts looking for profits of $3.08 per share on $31.01 billion in second quarter revenue. The stock ended a four-week decline after the retail giant raised fiscal year 2020 estimates above consensus in May's first quarter release, gaining ground in a steady uptick that posted an all-time high near $220 in July.

The stock has been pulling back since that time while investors gauge the impact of tariffs on the company's broad product line. Home Depot also reported the weakest comparative sales in seven years in May, with slumping housing and lumber markets dragging down quarterly revenues. Fortunately for bulls, the recent collapse in bond yields should act as a stimulus for home sales into 2020, with a greater share of the U.S. population qualifying for mortgages.

HD Long Term Chart (1993 – 2019)

A multi-year uptrend split six times before topping out at $11.45 in 1993, giving way to a narrow consolidation that persisted into a 1997 breakout. The uptick attracted strong buying interest, adding three more splits into the first quarter of 2000, when the rally ended at $69.75. The peak marked a secular high that wasn't challenged for the next 13 years, ahead of a downtrend that found support near $20 in February 2003.

The stock doubled in price and stalled out in 2005, grinding sideways in the low $40s into a 2007 breakdown that accelerated to an 11-year low during the 2008 economic collapse. That signaled the end of the nine-year downtrend, giving way to a healthy recovery wave that completed round trip into the 2005 high in 2011 and the 2000 peak in 2013. It paused at resistance into 2014 and broke out, posting multiple rally waves into the January 2018 high at $207.60.

Subsequent upticks added just 12 points into July 2019's historic peak, while the decline into August has dropped the stock under the 2018 high, reinforcing a broad trading range that could eventually signal a long-term top. However, there's no need to rush for the exits because a fresh leg of the decade-long economic expansion could also break tough resistance and lift this perennial market leader toward $300.

The monthly stochastics oscillator has posted a complex pattern since the fourth quarter of 2017, with descending highs that warn of declining relative strength. It crossed into a new sell cycle in June 2019 before reaching the overbought level, similar to 2018, adding considerable risk into the fourth quarter. Price action agrees with this cautionary analysis, carving a bearish broadening formation, with progressively longer and stronger selling waves.

HD Short-Term Chart (2016 – 2019)

The on-balance volume (OBV) accumulation-distribution indicator posted a new high with price in January 2018 and entered a distribution phase that accelerated into 2019, hitting an 18-month low more than two months after price bottomed out. Buying interest since that time has failed to repair the damage, stalling about three-quarters of the distance back to the high at the same time the stock posted an all-time high in July.

This bearish divergence correctly predicted the summer's failed breakout, adding pressure that could eventually yield a trip into the lower red line. Of course, that would be catastrophic for current positions because it has now stretched down to $145, or around 60 points below Monday's opening print. The reversal also confirms Home Depot's vulnerability to macro retail sector headwinds, which are compounded by the company's attunement to the U.S. economy. 

Multiple 2019 pullbacks have found support at the rising 200-day exponential moving average (EMA), which is now situated just under $200. Clearly, that's the price level to watch if this week's confessional triggers a sell-the-news reaction because a breakdown would set off strong sell signals. On the flip side, the first sign of technical improvement would come on a rally that mounts the narrowly aligned January 2018 high and 50-day EMA.

The Bottom Line

Home Depot stock failed a breakout above 2018 resistance in July, setting a cautious tone for this week's earning report.

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