Home Depot Breaking Down

05/18/06 01:25:10 PM

by Arthur Hill

After underperforming the S&P 500 for months, Home Depot is finally cracking with a high-volume decline.

Security: HD
Position: Sell

On the weekly chart (Figure 1), Home Depot (HD) formed a large triangle over the last 18 to 24 months. The stock formed reaction highs below 45 in 2004, 2005, and 2006. These were countered with higher lows over the same time frame and the overall pattern is one big triangle consolidation. A triangle is a neutral pattern that is dependent on a break for direction. The stock pierced trendline support with a sharp decline and is on the verge of a big support break at 37. Further weakness below 37 would solidify the triangle break and target a move to around 27. The width of the pattern (11) is subtracted from the trendline break (38) to determine a downside target (27).

FIGURE 1: HOME DEPOT, WEEKLY. HD formed reaction highs below 45 in the past three years, countered with higher lows over the same time frame. The overall pattern in one large triangle consolidation.

Graphic provided by: MetaStock.

The stock has yet to break below its October 2005 low, but poor relative strength increases the odds of a break. While the S&P 500 worked its way higher the last few months, HD could not break above 45 and thus underperformed the index for over a year. The price relative also formed a triangle and broke support a few weeks before the stock. This indicator has since moved to a new reaction low and HD is not holding up well.

Downside volume was the highest since August 2003, and this surge in selling pressure shows a change in investor outlook. A high-volume decline after an extended move lower could be viewed as a selling climax. However, this high-volume decline came after a consolidation. The consolidation represents indecision, and the high-volume decline tilts the balance in favor of the bears.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

Title:	Editor
Company:	TDTrader.com
Address:	Willem Geetsstraat 17
	Mechelen, B2800
Phone # for sales:	3215345465
Website:	www.tdtrader.com
E-mail address:	arthurh@tdtrader.com
Traders' Resource Links
TDTrader.com has not added any product or service information to TRADERS' RESOURCE.