NEW YORK (TheStreet) -- Investors should position for an up to 7.5% pop in Home Depot (HD) and Lowe's (LOW) shares after the companies report third-quarter earnings this week, as these momentum stocks will likely continue to mark new highs.
Trading momentum stocks is all about buying shares of companies on the theory that new highs will continue -- and here's why Home Depot and Lowe's look to have that momentum.
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Dow component Home Depot set an all-time intraday high at $99.36 on Nov. 13 and has beat expectations for 9 straight quarters, typically rallying on the news. Look for shares to jump higher if the company delivers its 10th-straight earnings beat when it reports before the bell on Tuesday.
Shares of smaller arch-rival Lowe's, which also set an all-time intraday high of $58.76 on Nov. 14 and tends to move in lockstep with Home Depot, should also rise if it reports positive third-quarter results before market open on Wednesday.
Investors should always have an exit strategy when investing and trading momentum stocks. One strategy is to have a price target and enter a "good 'til canceled" limit order to book profits on strength to that level. Also have an exit strategy following a rising key weekly moving average. As momentum continues and the stock moves higher, this moving average will rise each week. Enter a sell-stop to lock in gains if the stock falls below this average.
Here's how to trade these momentum plays.
Both companies have similar technical chart profiles, so let's look at the must-see charts for Home Depot starting with the daily chart going back to the fourth quarter of 2012.
Courtesy of MetaStock Xenith
Home Depot ($98.24) -- If you are buying Home Depot at today's level assume that there is at least 7.5% upside potential. Enter a "good 'til canceled" limit order to sell strength to $105.60, 7.5% above $98.24. Enter a sell-stop below a key technical level at $93.55. This level will change at the end of the year.
Lowe's ($58.58) -- The technicals suggest that the upside for Lowe's is below 7.5%. Enter a "good 'til canceled" limit order to sell strength to $61.85, 5.6% above $58.58. Enter a sell-stop below its key weekly moving average at $55.47. This level will rise each week.
The daily chart for Home Depot, which closed Friday at $98.24, shows that investors had several opportunities to buy this stock along its 200-day simple moving average (green line) between Jan. 29, when the average was $77.42, and July 10, when the average was $78.78.
The stock declined 8.9% from a high at $94.79 on Oct. 9 to $86.35 on Oct. 16, but there was no technical reason to sell the stock as it stayed well above its 200-day SMA, now at $83.72.
Note that shares of Home Depot popped higher following better-than-expected earnings reports on Feb. 25, May 20 and Aug. 19. The company has an earnings winning streak of nine consecutive quarters.
Investors could have bought Lowe's ($58.58) along its 200-day simple moving average between Feb. 4, when the average was $45.58, and August 6, when the average was $47.72.
Here's Home Depot's weekly chart since the start of 2007.
Courtesy of MetaStock Xenith
The weekly chart clearly shows that the longer-term momentum run-up for the stock began from the 200-week simple moving average (green line) in August 2011 when this average was $28.79. The weekly chart is positive but overbought with the key weekly moving average at $94.51. The overbought momentum reading is shown at the bottom of the graph with a reading of 88.97 well above the 80.00 overbought threshold.
The momentum run-up for Lowe's, whose shares closed Friday at $58.58, began in November of 2011 from its 200-week simple moving average, then at $22.28.
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At the time of publication the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates HOME DEPOT INC as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:
"We rate HOME DEPOT INC (HD) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, good cash flow from operations, solid stock price performance and impressive record of earnings per share growth. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."
You can view the full analysis from the report here: HD Ratings Report