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How to Trade Home Depot as Stock Slips on Strong Earnings

Home Depot shares are lower on Tuesday despite the company crushing analysts' expectations. Here's what the chart tells us going forward.

Home Depot  (HD) - Get Report is kicking off the retail earnings reports on Tuesday. The stock initially traded 1.4% higher on the day but has given up its gains and is now down about 1%.

Up 1.4% wasn't very impressive to begin with, but when we consider the run that Home Depot enjoyed before the earnings report, the muted post-earnings reaction is more reasonable. It’s even attractive in some investors’ eyes.

The company shot the lights out, crushing earnings and revenue expectations as sales soared more than 30% year over year. Comparable-store sales also beat expectations by a wide margin.

Despite the numbers, the shares are struggling for direction.

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We’re seeing similar, although slightly better, price action out of Walmart  (WMT) - Get Report. Despite strong results, the stock is up just 2% on the day. On Wednesday, we’ll hear from Lowe’s  (LOW) - Get Report, which may have an impact on Home Depot as well.

We now know that business is going well, but what can we expect from the stock going forward?

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Trading Home Depot Stock

Daily chart of Home Depot stock.

Daily chart of Home Depot stock.

We must make a few observations about Home Depot stock in respect to the daily chart above. The most glaring is the massive run we’ve seen from the recent low.

From the March 5 low to the May 10 high, the shares rallied 40%.

From the start of that run, the stock climbed in 23 of 30 trading sessions. In each of those “down days,” the stock never fell more than 1%, and in three of the seven the shares fell 12 basis points or less.

Talk about a stellar run for the bulls. But we recently saw a quick 8.5% correction from the highs in just a couple of days. After a rebound last week, it was clear that the 10-day and 21-day moving averages were acting as resistance.

These measures are now acting as resistance after the earnings, too.

But the shares continue to find support at the 10-week moving average and just above the 50-day moving average. Support also comes into play at the 161.8% extension. If this area fails as support, it could put the $293 to $300 area in play, as well as the 21-week moving average.

For now, I like the way Home Depot stock is holding its current levels after such a strong rally. But we really need to see the stock reclaim the 21-day and 10-day moving averages to get any real momentum going on the upside.

A close above those marks puts $340 in play.