Home Depot Has Pattern Problems

A bearish eveningstar reversal pattern has formed on the Home Depot  (HD) weekly chart, and it suggests the stock may have put in an intermediate-term top. The three-period pattern consists of a large white candle, followed by a narrow opening and closing range "doji" candle and completed by a large dark candle.

The sequence of candles reflects a transition from bullishness to bearishness, and while it is a rare formation, it is often seen at important tops. Last month the stock price jumped after the company reported positive earnings and raised full-year 2015 guidance, but it leveled off this month and may be preparing to work off the overbought condition reflected by the weekly stochastic oscillator.

On the daily chart, stochastics has moved out of its overbought zone and is tracking lower, and moving average convergence/divergence made a bearish crossover. These negative momentum indications preceded a price break below a narrow channel support line that formed this month. Accumulation/distribution is testing its rising 21-period moving average and Chaikin money low, a 21-period average of the A/D line, has moved below its signal average. These initial signs of weakening positive price and money flow momentum, coupled with the consolidation pattern breakdown suggest the stock is in the process of reverting back toward its 50-day moving average and potentially the $122.50 area.

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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