Shares of Home Depot Inc. (HD, Financial) rallied along with the broader market on Tuesday, completing a two-day bullish reversal that now puts the stock in a near-term favorable position. HD stock in the bigger picture remains in a bullish trend, which favours higher prices, at least until the stock reports its next batch of earnings on Feb. 24.
Through the multi-year lens, HD stock continues to trend higher, although upside momentum as represented by the Relative Strength Index (RSI) at the top of the chart is well in overbought territory. Importantly, however, this is no ‘sell signal’ but rather a confirmation of a strong trend.
If we cover the Bollinger Bands (green lines) we see that after HD stock consolidated sideways from mid-2013 until mid-2014 and ever since the breakout in August 2014 the stock has been trending higher between the mid-point Bollinger line (green dotted line) and the upper line. This, too, confirms a strongly trending stock, which however the longer this strong trend persists the more it will be at risk of a mean-reversion move lower.
If we look at the daily chart of HD stock, we see that it has bounced off its rising 50-day simple moving average shown with blue line four times since mid-November. The most recent of those bounces took place on Monday, when the stock staged a sharp intraday reversal higher after a bump into the 50-day, which on Tuesday was followed with continuation buying that nearly took the stock back to all-time highs set last week.
In the near-term, the stock thus now sets up for more upside on the back of this two-day bullish reversal.Traders could consider buying the stock around the $107 level for a cash-flow trade that may get the stock into the $111.50 area before the earnings report later this month.
