Buyers are returning to Dow component The Home Depot, Inc. (HD) after a fourth quarter decline dropped shares of the home improvement giant nearly 11%. A third quarter revenue shortfall and 2020 profit warning triggered the downdraft, which added to concerns that a "strategic investment plan" would reduce margins in the new decade. Shares of rival Lowe's Companies, Inc. (LOW) fell in sympathy with the news but charged higher in the next session after Lowe's reported a solid quarter.

The November release shocked many shareholders, coming right after Home Depot raised expectations at a Goldman Investor Conference, stating that U.S. consumer spending remained "exceptionally healthy." Recent buyers are shaking off that flip-flop, expecting the company to resume its long string of excellent quarterly results. However, Wall Street analysts remain skeptical, with multiple downgrades outweighing a single major upgrade since the release.

HD Long-Term Chart (1990 – 2020)

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

The stock turned sharply higher after the 1987 stock market crash, splitting an astounding nine times into the April 2000 high at $70.00. That marked the highest high for the next 13 years, ahead of a major decline that unfolded in multiple selling waves into 2003's eight-year low at $20.10. The subsequent bounce posted modest gains into the fourth quarter of 2004, topping out at the 50% sell-off retracement in the mid-$40s.

October 2007's triple top breakdown signaled renewed selling interest that gathered momentum during the 2008 economic collapse, finally ending at an 11-year low in the upper teens. That marked the end of the eight-year downturn, giving way to a modest uptick that lifted into a more vertical trajectory in 2011. The stock finally completed a round trip into the 2000 high in 2013 and broke out, with solid momentum kicking into gear about one year later.

The uptrend posted strong gains into January 2018, when it topped at $207, at the same time that President Trump fired the first shot in the trade war. An expanding range through the rest of the year battered shareholders with a nominal new high, following by a fourth quarter decline to a 15-month low. Committed buyers finally returned in force in 2019, generating a steady uptick that posted an all-time high at $239.31 on Nov. 18, just ahead of the earnings shortfall.

The monthly stochastics oscillator crossed into a sell cycle from the overbought zone in November, predicting at least six to nine months of relative weakness. The indicator is now accelerating through the panel's midpoint, warning that bearish energy is gaining momentum despite the recent bounce. This configuration also raises the odds that the correction that started in November is still in force, increasing the possibility for renewed selling interest that tests the prior low.  

HD Short-Term Chart (2017 – 2020)

HD
TradingView.Com 

Price action has carved a broad rising wedge pattern since January 2018, with an August 2019 breakout failing in November. The subsequent decline pierced wedge support in early December, while the bounce into January is hugging the underside of new resistance. Taken together with the bearish stochastics cycle, the recovery wave could easily stall right here, ahead of a trip back to the 200-day exponential moving average (EMA) near $215.

The on-balance volume (OBV) accumulation-distribution indicator highlights impressive buying pressure that has now reached an all-time high. There are two ways to view this bullish divergence, given long-term technical readings. First, price will follow in a rally wave that tests the bull market high, or second and more likely, newly minted shareholders will add to downside pressure when their positions drop into the red and they want to get out.

The Bottom Line

Home Depot stock has bounced off November’s deep low, but adverse relative strength cycles predict that the correction hasn't come to an end.

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