Home Depot's Charts Show Earnings Winning Streak on the Line

NEW YORK (TheStreet) -- Home improvement chain Home Depot (HD) has been a strong momentum stock since holding its 200-week simple moving average back in August 2011.

The stock enters this week with a negative divergence in technical momentum. Still, the stock is above its 50-day simple moving average and key weekly moving average. This setup favors a "sell on strength" strategy because the stock will likely stay below its all-time intraday high of $117.99 set on March 20.

Analysts expect Home Depot to earn $1.15 a share when the company reports earnings before the opening bell on Tuesday. The company has beat estimates for 11 consecutive quarters. With declining consumer confidence, this winning streak is on the line.

Some analysts say earnings growth should remain impressive because consumers were spending on home remodeling. Others say the company will earn $1.18 a share, continuing the earnings winning streak.

Home Depot is a component of the Dow Jones Industrial Average, which is up 2.5% year to date ending Friday with a close of 18,272.56 just below its all-time intraday high of 18,288.63 set on April 27. Home Depot is outperforming the Dow 30 with a gain of 8% for the year to date.

Let's look at the daily and weekly charts for Home Depot and provide the key technical levels at which to buy on weakness and the key technical levels at which to sell on strength.

Investors not familiar with technical analysis should begin with the notion that a price chart for a stock shows a road map of past price performance, which provides guidance for predicting future share price direction.

Here's how to read a daily chart. There are two moving averages to follow; the 50-day simple moving average is in blue while the 200-day simple moving average is in green.

Here's how to read a weekly chart. This chart shows weekly price bars going back to the beginning of 2007 and thus includes the Crash of 2008, then the current bull market for stocks that began in March 2009. The red line tracks the ups and downs of the key weekly moving average. The green line is the 200-week simple moving average. The red line that oscillates along the bottom of the chart is the momentum reading on a scale of 00.00 to 100.00. A reading below 20.00 is oversold and a reading above 80.00 is overbought.

A technically positive weekly chart occurs when a stock ends a week above its key weekly moving average with the momentum reading rising above 20.00.

A technically negative weekly chart occurs when a stock ends a week below its key weekly moving average with the momentum reading declining below 80.00.

Here's the daily chart for Home Depot.


Courtesy of MetaStock Xenith

Home Depot had a close of $113.35 on Friday for a gain of 8% year to date with the stock 3.9% below its all-time intraday high of $117.99 set on March 20.

The stock has been above its 200-day simple moving average since July 10 when this average was $78.78. The stock rebounded on Friday to close just above its 50-day simple moving average of $113.22 and well above its 200-day simple moving average now at $101.67.

Here's the weekly chart for Home Depot.


Courtesy of MetaStock Xenith

The weekly chart for Home Depot will shift to negative if the stock closes this Friday below its key weekly moving average of $112.65 as its momentum reading of 57.83 is down from 64.01 last week. Note that the long term momentum uptrend for the stock began during the week of August 12, 2011 when the stock held its 200-week simple moving average, then at $28.79. The 200-week has since risen to $70.99.

Investors looking to buy Home Depot should place a good till canceled limit order to purchase the stock if it drops to $104.04, which is a key level on technical charts until the end of June.

Investors looking to reduce holdings should place a good till canceled limit order to sell the stock if it rises to $115.67, which is a key level on technical charts until the end of June.

A key level of $112.37 should provide a magnet until the end of June.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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