Home Depot (HD) - Get Report in the Tuesday premarket reported another earnings beat but missed on sales. The stock closed Monday by testing its quarterly risky level at $237.72 with an all-time intraday high of $239.30.
The Atlanta home-improvement giant's stock dipped to its semiannual pivot at $226.61 at the open Tuesday. From high to the morning low of $225.55, the stock dropped by 5.7%.
My call is to be patient and buy the stock on weakness to its annual value level at $207.32. If it rebounds, reduce holdings on strength to its quarterly risky level at $237.72.
Monday's close before the earnings prompted technical warnings to sell the stock. The shares were testing a risky level, and its weekly slow stochastic reading was above 90 on a scale of 00 to 100, which I call an inflating parabolic bubble.
Another warning is that this week will likely confirm a negative weekly key reversal. This happens when a stock sets its all-time high, then closes the week below the prior week's low, which is $230.18.
Home Depot is a Dow Jones Industrial Average component and is not a cheap stock. The shares trade at a p/e multiple of 23.26, and the dividend yields 2.29%, according to Macrotrends.
The stock has performed strongly this year. At Monday's close of $238.85, it was up 39% year to date and in bull- market territory 51% above its Dec. 24 low of $158.09.
Home Depot has now beaten earnings-per-share estimates in every quarter since November 2012. Third-quarter posted another beat, but the world's largest home improvement retailer lowered its full-year sales guidance. Here's the full earnings report as analyzed by TheStreet.com.
The Daily Chart for Home Depot
Courtesy of Refinitiv XENITH
Home Depot has been trading under the influence of a "golden cross" since April 12 when the 50-day simple moving average rose above the 200-day simple moving average to indicate that higher prices would follow. This remains in play on the chart, but the buy level is the 200-day SMA now at $209.30. The close of $171.82 on Dec. 31 was a major input to my proprietary analytics and the annual pivot remains at $207.32 as a value level. The annual level was a magnet between April 18 and Aug. 19. The close of $207.97 on June 28 was input to my analytics and a semiannual pivot is at $226.61 and is magnet in today's trading. This level was also a magnet between Aug. 29 and Oct. 8. The close of $232.02 on Sep. 30 was another input to my analytics and its fourth quarter risky level is $237.72 which was tested at Monday's close. The close of $234.58 on Oct. 31 was an input that resulted in a monthly risky level above the chart at $245.12.
The Weekly Chart for Home Depot
Courtesy of Refinitiv XENITH
The weekly chart for Home Depot shows how fast the technicals can change for a stock. Before earnings this was positive but overbought with its 12x3x3 weekly slow stochastic reading above 90 as an "inflating parabolic bubble." Now the chart shows a potential downgrade to negative this week or next week. The stock below its five-week modified moving average of $231.37. The stock is well above its 200-week simple moving average or "reversion to the mean" at $170.04. Now the 12x3x3 weekly slow stochastic reading is projected to decline to 82.54 down from 89.99 on Nov. 15. If this reading ends the week below 80.00 the weekly chart will be negative.
Trading Strategy: Buy weakness to the 200-day SMA at $209.29 and its annual value level at $207.32. Reduce holdings on strength to the quarterly risky level at $237.72.
How to use my value levels and risky levels:
Value levels and risky levels are based upon the last nine monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31, 2018. The original annual level remains in play.
The close at the end of June 2019 established new monthly, quarterly and semiannual levels. The semiannual level for the second half of 2019 remains in play.
The quarterly level changes after the end of each quarter so the close on Sep. 30 established the level for the fourth quarter.
The close on Oct. 31 established the monthly level for November.
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 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 its time horizon expires.
How to use 12x3x3 Weekly Slow Stochastic Readings:
My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing 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.
Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble" as a bubble always pops. I also call a reading below 10.00 as being "too cheap to ignore."
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.