Skip to main content

Shares of Home Depot (HD)  were taking a tumble on Tuesday, down more than 5% after Wall Street reacts to the company's third-quarter earnings report.

Given the headline results, investors may feel lucky that the stock is only down that much. The decline puts a critical level of support on watch as investors continue to digest the results.

Earnings of $2.53 a share were roughly in-line with analysts' expectations, while revenue of $27.22 billion grew 3.5% year over year but missed consensus estimates by about $300 million. Further, comparable-store sales growth of 3.8% missed estimates of 4.7% growth.

Worse, gross margins and operating margins slipped, while management reduced its full-year outlook for both revenue and comp-store sales growth.

Home Depot had stood alongside companies like Target (TGT) , Walmart (WMT) and Costco (COST) as dominate retail stocks. However, this quarter will surely cause some investors to re-evaluate the name.

It's one reason why Home Depot is Real Money'sStock of the Day. Let's take a closer look at the charts.

Home Depot is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells HD? Learn more now.

Scroll to Continue

TheStreet Recommends

Trading Home Depot Stock

Image placeholder title

Ahead of Home Depot's quarterly results, investors were either looking for a breakout to new highs -- due to the ascending triangle setup -- or they were looking for a healthy pullback.

Given Tuesday's reaction, it's clear scenario No. 2 is panning out at the moment. In our pre-earnings outlook from Monday, we highlighted the importance of the $220 to $223 area.

Near the latter, investors will find the 100-day moving average, currently at $223.34. A bit further below sits channel support (purple line). Both have played a major role as support over the course of 2019.

While HD stock hasn't tested down into this level quite yet, it will be a critical area for bulls to defend should it get there. Below critical support and the 200-day moving average may be on the table.

If and when Home Depot stock bounces -- regardless of whether it tests down into key support -- see if the stock can reclaim the 50-day moving average on the upside. If it can't, HD will likely need more time consolidating and could test back down into support.

The bottom line: Bulls need to watch the $220 to $223 area. Should HD stock test down into this area and hold, it's a buy-the-dip candidate. Below and short-term bulls may want to exit with minimal losses and wait for Home Depot stock to reset.

This article is commentary by an independent contributor. At the time of publication, the author had no positions in the stocks mentioned.