Dow component The Home Depot, Inc. (HD) reports third quarter 2020 earnings in Tuesday's pre-market, with analysts expecting a profit of $3.02 per share on $28.6 billion in revenue. If met, earnings per share (EPS) would mark a 19% profit increase compared to the same quarter in 2019. The stock posted an all-time high less than two weeks after the retailer beat second quarter top- and bottom-line estimates in August and has been grinding sideways since that time.

Key Takeaways

  • Home Depot stock is trading below all Wall Street price targets.
  • The stock posted an all-time high and sold off in August after a strong bull run.
  • Bears are growing more active under the surface, raising the potential for a long-term top.

The retail giant has benefited from the COVID-19 pandemic, with millions of social-distanced Americans forced to tackle home improvement projects to keep from going stir-crazy. In addition, the ongoing exodus from U.S. urban centers has underpinned new and existing home sales, adding a secular tailwind. Even so, the often slow-moving stock has already gained 27% in 2020 while high unemployment rates threaten to shrink the buying power of potential customers.

Wall Street consensus has been wildly bullish on Home Depot through most of 2020, now standing at a "Strong Buy" rating based upon 25 "Buy" and 4 "Hold" recommendations. No analysts are telling shareholders to close positions and move to the sidelines. Price targets currently range from a low of $300 to a Street-high $337, while the stock opened Monday's session about $22 below the low target. This huge disconnect suggests that analysts should take a second look at their numbers.

Secular is a descriptive word used to refer to market activities that occur over the long term. Secular can also point to specific stocks or stock sectors unaffected by short-term trends. Secular trends are not seasonal or cyclical. Instead, they remain consistent over time.

Home Depot Monthly Chart (2000 – 2020)

Chart showing the share price performance of The Home Depot, Inc. (HD)

A multi-year uptrend topped out at $70.00 in April 2000, posting a high that wasn't challenged for the next 12 years, ahead of steep decline that found support near $20 in 2003. It performed poorly during the mid-decade bull market and rolled over once again in 2006, entering a selling wave that undercut the prior low by three points during the 2008 economic collapse. A recovery wave off that level accelerated in 2011, reaching long-term resistance in 2013.

A 2014 breakout attracted strong buying interest, igniting a powerful uptrend that stalled above $200 in the first quarter of 2018. That price level marked resistance into an August 2019 breakout that added nearly 50 points into February 2020. The subsequent decline hit a three-year low near $140 in March, giving way to a V-shaped recovery wave that completed a 100% retracement into the first quarter high in May.

Home Depot Short-Term Outlook

The stock broke out immediately and eased into a test of new support near $250, finally ejecting into a rally wave in July. The uptick posted an all-time high at $292.95 on Aug. 27 and rolled over, entering a rectangular pattern that resisted an October breakout attempt. Price action has now settled at the 50-day exponential moving average (EMA), in a neutral configuration that favors neither bulls nor bears ahead of Tuesday's confessional.

However, the monthly stochastic oscillator has entered a sell cycle that is now expanding through the panel's midpoint, indicating that bears are controlling price action. It's a cause for concern because the stock mounted the top of a bearish broadening formation a.k.a. "megaphone" in July, and a failed breakout would expose huge downside into the $120 zone. That's unlikely, but a selloff into the pattern's midpoint at the 200-month EMA just above $200 would still be painful for shareholders.

A broadening formation is a price chart pattern identified by technical analysts. It is characterized by increasing price 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.

The Bottom Line

Home Depot stock has entered a potential topping pattern after posting an all-time high in August.

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