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Home Depot Is Testing Breakout Territory as Earnings Loom

Home Depot, the home-improvement giant, is pointing higher.

With millions of Americans stuck at home right now amid the cover-19 crisis, household to-do lists are getting more attention than usual.

That’s translated into serious outperformance in shares of home improvement giant Home Depot  (HD) - Get Home Depot, Inc. Report. And now, as shares head into earnings next week, the big box retailer is teetering on the edge of breakout territory.

Home Depot reports its fiscal first-quarter earnings next Tuesday. On average, analysts are looking for earnings of $2.23 a share. That’s about a cent higher than the same period a year ago.

Home Depot has been a relative strength superstar during the coronavirus pandemic.

Over the last 12 months, Home Depot has generated 22% total returns vs. an 11.87% drop for the typical S&P 500 stock over that same timeframe.

That recent performance matters a lot right now. Simple as it seems, buying what’s working is a sound strategy during crisis market environments.

Looking back at prior crisis investing environments over the last three-and-a-half decades, stocks that have positive six-month relative strength saw a 78.4% chance of a positive one-month return.

That’s about a 50% higher future win rate than the average S&P 500 stock.

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To figure out how to trade Home Depot here, we’re turning to the chart for a technical look.

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Home Depot sold off hard in March, but it snapped back even harder halfway through the month, putting shares back above support from last December down around $210. Shares’ resistance level just above $247 is the breakout level to watch here.

If Home Depot can push through that price tag, which also happens to be a psychologically-important all-time high for the stock, then it opens considerable upside potential.

In the more immediate-term, it’s likely we’ll see at least some sideways consolidation, given the explosive move higher off of Home Depot’s March lows. A sideways grind gives buyers and sellers a chance to absorb the scale of the move. Moving towards the more intermediate-term, though, the stats clearly favor a test of breakout territory.

As they're priced in today, next week's earnings aren't likely to be a major impact on that trajectory either.

Currently, option volatilities imply around a 6% 1-day price reaction to Q1 earnings. That’s not enough to send shares above $247, but just as critically, it’s not presently enough to cause shares to violate $210 support either.

From a relative strength standpoint, Home Depot is clearly in the leadership category right now – only the top decile of S&P 500 components are within 8% of 52-week highs right now.

Look for more upside ahead in Home Depot.