Home Depot Is Testing Breakout Territory as Earnings Loom

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

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.