Here's Why Home Depot Is About to Rally

HD is breaking free of its eight-week pullback. Here's how to trade it now.
By Gary Morrow ,

Shares of Home Depot (HD) - Get Report are setting up for a fresh rally leg. The stock finished Wednesday with a 1.7% gain on accelerating trade. This impressive move was the second best performance in the Dow Jones Industrial Average. HD is now clearly breaking free of its eight-week pullback and appears headed for a new rally phase.

In early April, HD's powerful rally off the February low, which had lifted the stock over 25%, was unable to clear the 2015 high. The stock spent the remainder of the month in a very narrow range as it continued to bump up against heavy resistance near last year's peak. By the second week of May, it appeared that an upside breakout was on the way, but the rally on the May 10 failed, and the consolidation pattern continued. HD began to fade in mid-May, and by early June, the potential for a deep pullback was growing.

During the second half of June, selling pressure picked up dramatically, but further downside was limited. HD fell only slightly below its 200-day moving average before regaining its footing near the March lows. During the Brexit flush, this key level, just below $124, was retested and held. The rebound off last week's low has lifted the stock back above the 200-day and has left behind a very solid support zone.

In the near term,  HD investors should consider the stock a buy on weakness. Initial support is in place between the $130 and $128. If shares can continue to build upside momentum off nearby support, a rally back up to the 2016 highs near $138 is a strong possibility. On the downside, a close back below the Friday low of $126 would drop the stock back into basing mode.

Click here to see the below chart in a new window. 

Disclosure: This article is commentary by an independent contributor. At the time of publication, the author was long HD.

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