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Home improvement giant The Home Depot, Inc. (HD) reported better-than-expected earnings on Feb. 25. The stock rebounded at the open but stayed below its all-time intraday high of $247.36 set on Feb.21. At the high, this component of the Dow Jones Industrial Average stayed shy of its annual risky level at $249.87, which was a warning.
The stock ended last week at $217.64, down just 0.2% year to date and in correction territory at 11.9% below its all-time high. Going back to its Dec. 24, 2018, low of $158.09, the stock is in bull market territory, up 37.8%.
Fundamentally, Home Depot stock is not cheap, as its P/E ratio is 21.92, according to Macrotrends. The stock has a favorable dividend yield of 2.56%. Selling pressure was caused by concerns that consumer spending will be slow as the coronavirus spreads.
The daily chart for Home Depot
Home Depot stock had been benefiting from a “golden cross” that was confirmed on April 12, 2019. This buy signal occurs when the 50-day simple moving average rises above the 200-day simple moving average to indicate that higher prices lie ahead. When a stock is above a “golden cross,” the strategy is to buy weakness to its 200-day simple moving average. This buying opportunity occurred on May 21, when the average was $188.94. There was another buying opportunity on Dec. 11, when the average was $211.48.
The close of $218.38 on Dec. 31 was a major input to my proprietary analytics. The annual risky level is above the chart at $249.87. Its semiannual risky level at $226.94 was a level at which to reduce holdings. The quarterly value level at $215.13 was a level at which to add to positions. The close of $217.84 on Feb. 28 was an input to my analytics, and Home Depot’s monthly risky level for March is $238.89.
The weekly chart for Home Depot
The weekly chart for Home Depot is negative, with the stock below its five-week modified moving average at $231.09. The downside risk is to its 200-week simple moving average, or “reversion to the mean,” at $176.88. Its 12 x 3 x 3 weekly slow stochastic reading declined to 75.76 last week, down from 78.03 on Feb. 21.
Trading strategy: Buy Home Depot shares on weakness to the 200-week simple moving average at $176.87 and reduce holdings on strength to the semiannual risky level at $226.94. Its quarterly pivot at $215.13 should be a magnet.
How to use my value levels and risky levels: The stock closing prices on Dec. 31, 2019, were inputs to my proprietary analytics. Quarterly, semiannual, and annual levels remain on the charts. Each uses the last nine closes on these time horizons.
Monthly levels for March were established based upon the February 28 closes. New weekly levels are calculated after the end of each week. New quarterly levels occur at the end of each quarter, while semiannual levels are updated at mid-year. Annual levels are in play all year long.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.
How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered “too cheap to ignore,” which typically is followed by gains of 10% to 20% over the next three to five months.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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