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Home Depot Earnings Preview: The Must-Know Levels to Trade It

Home Depot stock will be in the spotlight on Tuesday as the company reports earnings. Here's what we're looking for when it reports.

If I were looking for a definition of consolidation, I would pull up a chart of Home Depot  (HD) - Get Home Depot, Inc. (HD) Report.

Shares rallied in 14 out of 15 sessions from its low on Oct. 4 and amid that run, ripped off 11 straight daily gains. 

The rally sent Home Depot to new all-time highs and since that rally, we’ve seen the stock consolidate in an incredibly tight range.

For what it’s worth, almost the same exact price action has been taking place in Lowe’s  (LOW) - Get Lowe's Companies, Inc. (LOW) Report.

Both stocks are up impressively from Oct. 4, with Home Depot and Lowe’s up 33% and 41%, respectively.

About a month ago, analysts made the case that both companies could handle the current supply chain disruptions that much of the world is experiencing.

With Home Depot’s earnings release now on deck for Tuesday before the open, how will we trade the reaction?

Trading Home Depot Stock

Daily chart of Home Depot stock.

Daily chart of Home Depot stock.

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When we look back to the Oct. 4 low, we can see a handful of “wicks” down in the $325 area. That was as the stock was hammering out a bottom in the stock price.

After reclaiming the 50-day moving average, this measure became support. Since then, Home Depot stock has been riding the 10-day and 21-day moving averages higher.

Interestingly, the 161.8% extension has become resistance near $375. On the downside, we have a minor uptrend support level to measure against (blue line) as the $365 area has been support this month.

Going forward, traders are going to look for a break of this range, regardless of the direction.

On the downside, they’ll want to see how Home Depot handles $365. Does it gap below it and try to reclaim this level, or will the stock open above $365 and trade down into it?

If it’s the latter, we’ll need to see if the stock is supported or if it fails and the stock trades lower. Below $365 and the 21-day moving average will put the 10-week moving average in play near $357.

This would be a reasonable buying opportunity if the bulls show up and buy the dip.

Below the 10-week could put the 50-day moving average and prior $345 high in play.

On the upside, we need to see the stock clear $375. If it can do that, it may open the door to the $390 to $392 area, where it finds the two-times range extension. Above that and $400-plus is on the table.