It’s no surprise that the more interest rate sensitive stocks have been showing relative weakness of late. Homebuilders and housing-related stocks fall into this category, and the SPDR S&P Homebuilders (NYSE: XHB) has fallen 12% since May.
One XHB component, home improvement retail giant The Home Depot, Inc. (NYSE:HD), is currently off about 5% from its mid-July double-top highs. The stock’s most recent consolidation pattern has taken the shape of a bear flag, which rests right on top of a multi-month support line. A break lower and out of this formation could net traders quick profits on the short side.
Let’s start with the weekly chart dating back to 2005 to gain some perspective on the stock’s longer-term trend.
The Home Depot, Inc. (NYSE:HD) is one of the relatively few housing-related stocks that are now trading significantly above their pre-financial-crisis highs. While the stock did experience a significant drop-off during the bear market, it also recovered sharply.
After developing two important higher highs in the summer of 2010 and the summer of 2011, by late 2011 the stock managed to push past a resistance line that dated back to 2005. From there, the rest is history as they say, as The Home Depot, Inc. (NYSE:HD) vaulted roughly 110% higher in a straight shot that led to this summer’s double-top formation.
After this two-year-long nearly vertical leap, HD finally broke down through its uptrend line in August.
Although the stock remains safely above its 200-day simple moving average, it has already snapped both its 50-day and 100-day moving averages without much effort. This is a notable development for the stock, as it tends to respect these three moving averages.
After carving out the double-top with peaks in late May and mid-July, The Home Depot, Inc. (NYSE:HD) finally confirmed the topping formation on Aug. 14 and 15, with two consecutive days of heavy selling.
Since then, the stock has traded in a weak fashion, but found support at a neckline near the $74 area. What’s more, the now two-week-long consolidation pattern is beginning to take the shape of a bear flag right on top of the neckline support.
Through this lens, The Home Depot, Inc. (NYSE:HD) is offering traders looking to short the stock a very clear entry point on a daily close below $73.50-$74. If and when the stock closes below this confluence area of support, traders could take advantage of a swift acceleration lower.
What factors might push HD below this support area and thus trigger a short-side signal?
The first and most obvious culprit is a continued push higher in interest rates, which at this stage looks to have staying power through the autumn months. Second, any further flare ups of geopolitical tensions surrounding Syria would stand a good chance of adding volatility to the overall market and likely push stocks lower.
Recommended Trade Setup:
— Short HD on a daily close at or below $73.50
— Set stop-loss at $75
— Set initial price target at $69 for a potential 6% gain in 3-6 weeks
Note: Learn more about the strategies Serge Berger uses to create a profit in the market every day. Download his trading plan in the “Essence of Swing Trading” eBook, by clicking here.
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