SubscribeHome Depot (HD)
Home Depot (HD)
A visitor recently left a message in regards to the security Home Depot and wondered what my opinion was of the stock. On a one-year weekly chart, neither the MACD nor DMI have failed to break down…yet. Since the comment hinted at a short-term focus, my outlook will stem from the perspective of a six-month daily chart. There are two very important developments occurring in this stock right now that serve as a warning that now may be the time to take profits.
Divergences that go against your position, whether you are long or short, are the types signals that can not be ignored. They warn of impending doom and eat away at the profits you worked hard to earn. Why put yourself in this type of trap when there are other investments out there just ripe for the picking.
In the chart below, you will notice that the MACD and RSI have already formed two points that can be connected to show a declining trend line. This is important to note because in the same time frame the price of Home Depot had been rising in a rapid fashion. This conflicting data warns that the upward momentum is quickly coming to a close and that you should probably take some profits off the table sooner rather than later. This is not to say that the stock will collapse tomorrow, but the ability of the stock to make new heights is in serious question.
Another aspect to support this analysis can be found in the $42/share resistance area that the stock recently butted heads against. It is likely that this resistance level will hold and may very well send the stock crashing if there is another failed attempt to breach this ceiling. This bullish scenario is known as a double top and would justify liquidating the entire position before things get really ugly in the short-term. Keep in mind that my analysis is being conducted on a six-month daily chart and does not reflect the long-term prospects or health of the stock. The anticipated decline in price may knock the stock down temporarily, but percentage-wise it makes all the difference to a daytrader.
Good Investing…
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Comment by Bubs on 13 January 2007:
Thanks for the analysis of HD. Do you have any links or can you explain your strategy using the DMI and MACD? I currently trade breakouts from the daily charts and look for breakouts from a basing pattern. I just started trading very recently and am still learning and always looking at new strategies. You can see the type of trades I take from my blog. Thanks Again
Bubs
Comment by Stephen Oakes on 14 January 2007:
Bubs,
My strategy also looks for plays that have consolidated for a while and appear to be breaking out via strong momentum. However, I should warn you that the DMI & MACD strategy works best when utilizing a one-year weekly or two-year+ monthly chart. From there you will want to find stocks that have the shorter-term moving averages for both DMI and MACD crossing above their long-term plotted lines. Perhaps it would be best to explain it in plain English
When the blue line crosses above the red you should consider it a buy. When the red crosses above the blue it is an indication to sell. You are looking to find stocks in which the buying scenario “blue crossing above the red” holds true for both the DMI and MACD indicators. The key is to find both indicators giving buys within one or two weeks time, meaning that if a stock has had both the DMI and MACD buying signals for a while and has already experienced a significant move you will be paying premium for the stock and your risk/reward ratio increases. So, we want stocks that are just beginning to experience an explosive move from consolidation.
Next, place your stop loss between 5-10%. I always place it at 5% because if the signals are given and the stock reverses (no system is 100%) I can quickly move my capital to another momentum security.
If the stock never hits your stop loss then let it ride. The only to watch is the DMI and MACD. If by chance the stock losses momentum it is likely that you will see the red line cross above the blue signaling a negative divergence in either of the indicators mentioned above. Whatever indicator fails first you should automatically LIQUIDATE all shares and lock in profits.
I know this seems like a mouth full, but if you learn this system and apply the proper constrains, you will pull in consistent returns that most investors would only dream of.
It may also be useful to look at previous momentum plays that were recommended and review the graphs I provide showing specific buying and selling points with their respective indicators.
If you find the information on this site helpful please tell your friends and family to help spread the word. It would be greatly appreciated!
Good Investing,
Stephen