Home Depot, Inc. (The)Diupdate HD likely to head lower based on Elliott Wave, Other Technicals
Price / Trend
The proper starting point for technical analysis is always price, as many expert technical analysts teach. One major consumer discretionary stock, Home DepotHD, has been trending lower since year-end 2021. It has made a decisive series of lower highs and lower lows. A trendline above the highs going back to December 2021 is easily recognized (green line on chart above).
Moving Averages
The 200-day SMA has stopped moving upward and price has cut below it. In the powerful market rally in the major indices (
SPX and 
NDX) over the past two weeks, HD has failed to reach even its 200-day MA. Meanwhile the major indices and many stocks reached or even briefly recovered the 200-day MA.
Other key MAs (not shown for aesthetic purposes) are bearishly stacked and downward sloping on the daily chart including the 50-SMA, 34-EMA, 21-EMA and 8-EMA. Further, the 50-EMA, 34-EMA, 21-EMA and 8-EMA are downward sloping on the weekly chart, which provides an even stronger bearish trend signal.
Elliott Wave
After some time spent mapping out a plausible Elliott Wave scenario—starting at the pandemic lows in March 2020—HD appears in the midst of a corrective move.
First, at the all-time high of 420.61 on December 6, 2021,HD completed its 5th wave up from the pandemic lows in the larger degree of trend. The next question is whether the current move downward constitutes an A-B-C correction or the beginning of new longer-term downtrend comprising 5 larger waves. This remains unclear.
But whether the current downtrend is an A-B-C corrective move or the beginning of a longer-term 5-wave impulse move, the pattern has more downside to complete.
Assume the current downtrend is forming an A-B-C correction of the longer-term trend
Assuming conservatively that the current downtrend is forming a corrective A-B-C pattern (a countertrend to the larger uptrend), only the A and B waves have completed. The C wave has just begun.
In an A-B-C corrective pattern, the sub-wave structure is motive (5-waves) within the larger A and C waves and corrective in the B wave. (This is because the sub-waves are impulsive / motive 5-wave moves when moving the same direction as the trend of one larger degree—and here, the trend of one larger degree for the A and C waves is downward, correcting the 5-waves uptrend from the pandemic low.) This is evidenced by the 5-wave structure shown in for the presumed A wave (between December 6, 2021 and February 24, 2022).
Assume the current downtrend is a 5-wave impulsive move starting a new longer-term trend
The current downtrend from the ATH on December 6, 2021 could be the start of a new motive 5-waves downward, having completed Wave 1 (with sub waves 1-5 shown in blue) and Wave 2 (with subwaves shown in purple). If this scenario is accurate, then the next wave that has begun to form would be wave 3, which typically is the longest of the 5 waves. This scenario seems less plausible given the strength shown in the major US indices lately, and the fact that the boats (stocks) tend to follow the tide. However, it's prudent to consider all possibilities, and this remains a plausible scenario.
Fibonacci Projection
Using Fibonacci levels, the first portion of the downward move (from December 6, 2021 to February 24, 2022) can be projected from the March 18, 2022 highs. The 1.00 extension level equals 219.42. At this 1.00 extension level, the two legs of the entire correction would be equivalent in length, a frequent occurrence in highly liquid securities trade on major exchanges. For the next 2-3 months, a reasonable downside price target is first 265 (at the .618 extension) and then 220.00 (the 1.00 extension).
Ideal Trade Trigger
For a bearish position, the setup would be to wait for a bounce to the 21-EMA or 34-EMA on the daily chart. Because HD failed to reach its 200-day SMA on on the recent extraordinary rally in the major indices March 15-29, a retracement to the 200-day SMA is unlikely to occur.
Another option is to wait for HD to retrace to its last swing high on March 29, 2022 at 321.00. If HD remains cannot break that resistance level, then that might provide a good entry for a short with a stop at 321.00.
Momentum
Daily RSI shows momentum never recovered above 57 on the rally from Feb. 24, 2022 to March 18, 2022. RSI then failed at its 8 EMA on this chart and is trending down with a series of lower highs. My other momentum indicator, the Squeeze, shows that volatility is expanding on the current move downward along with negative momentum, which signals that the volatility will increase with downward price movement.
The proper starting point for technical analysis is always price, as many expert technical analysts teach. One major consumer discretionary stock, Home Depot
HD, has been trending lower since year-end 2021. It has made a decisive series of lower highs and lower lows. A trendline above the highs going back to December 2021 is easily recognized (green line on chart above). Moving Averages
The 200-day SMA has stopped moving upward and price has cut below it. In the powerful market rally in the major indices (
SPX and NDX) over the past two weeks, HD has failed to reach even its 200-day MA. Meanwhile the major indices and many stocks reached or even briefly recovered the 200-day MA. Other key MAs (not shown for aesthetic purposes) are bearishly stacked and downward sloping on the daily chart including the 50-SMA, 34-EMA, 21-EMA and 8-EMA. Further, the 50-EMA, 34-EMA, 21-EMA and 8-EMA are downward sloping on the weekly chart, which provides an even stronger bearish trend signal.
Elliott Wave
After some time spent mapping out a plausible Elliott Wave scenario—starting at the pandemic lows in March 2020—HD appears in the midst of a corrective move.
First, at the all-time high of 420.61 on December 6, 2021,
HD completed its 5th wave up from the pandemic lows in the larger degree of trend. The next question is whether the current move downward constitutes an A-B-C correction or the beginning of new longer-term downtrend comprising 5 larger waves. This remains unclear.But whether the current downtrend is an A-B-C corrective move or the beginning of a longer-term 5-wave impulse move, the pattern has more downside to complete.
Assume the current downtrend is forming an A-B-C correction of the longer-term trend
Assuming conservatively that the current downtrend is forming a corrective A-B-C pattern (a countertrend to the larger uptrend), only the A and B waves have completed. The C wave has just begun.
In an A-B-C corrective pattern, the sub-wave structure is motive (5-waves) within the larger A and C waves and corrective in the B wave. (This is because the sub-waves are impulsive / motive 5-wave moves when moving the same direction as the trend of one larger degree—and here, the trend of one larger degree for the A and C waves is downward, correcting the 5-waves uptrend from the pandemic low.) This is evidenced by the 5-wave structure shown in for the presumed A wave (between December 6, 2021 and February 24, 2022).
Assume the current downtrend is a 5-wave impulsive move starting a new longer-term trend
The current downtrend from the ATH on December 6, 2021 could be the start of a new motive 5-waves downward, having completed Wave 1 (with sub waves 1-5 shown in blue) and Wave 2 (with subwaves shown in purple). If this scenario is accurate, then the next wave that has begun to form would be wave 3, which typically is the longest of the 5 waves. This scenario seems less plausible given the strength shown in the major US indices lately, and the fact that the boats (stocks) tend to follow the tide. However, it's prudent to consider all possibilities, and this remains a plausible scenario.
Fibonacci Projection
Using Fibonacci levels, the first portion of the downward move (from December 6, 2021 to February 24, 2022) can be projected from the March 18, 2022 highs. The 1.00 extension level equals 219.42. At this 1.00 extension level, the two legs of the entire correction would be equivalent in length, a frequent occurrence in highly liquid securities trade on major exchanges. For the next 2-3 months, a reasonable downside price target is first 265 (at the .618 extension) and then 220.00 (the 1.00 extension).
Ideal Trade Trigger
For a bearish position, the setup would be to wait for a bounce to the 21-EMA or 34-EMA on the daily chart. Because HD failed to reach its 200-day SMA on on the recent extraordinary rally in the major indices March 15-29, a retracement to the 200-day SMA is unlikely to occur.
Another option is to wait for HD to retrace to its last swing high on March 29, 2022 at 321.00. If HD remains cannot break that resistance level, then that might provide a good entry for a short with a stop at 321.00.
Momentum
Daily RSI shows momentum never recovered above 57 on the rally from Feb. 24, 2022 to March 18, 2022. RSI then failed at its 8 EMA on this chart and is trending down with a series of lower highs. My other momentum indicator, the Squeeze, shows that volatility is expanding on the current move downward along with negative momentum, which signals that the volatility will increase with downward price movement.
Catatan
Note: I use equal weighted sectors to avoid the problem of the skewing towards tech that some of the top sectors have due to overweighting FAANG + TSLA names. For example, AMZN and TSLA together constitute nearly half of XLY (45.8%), the well-known consumer discretionary sector ETF by SPDR / State Street. So the performance of XLY shows a much different perspective than an equal-weighted version might reveal.
Catatan
Although I'm no expert at Elliott Wave, I would note that even Elliott wave experts (e.g., Elliott Wave International) can get it wrong at times. But Elliott Wave has a way of mapping out higher probability paths for price. This pattern on HD's chart (especially the larger trend A-B-C correction) looks more distinct than many EW patterns appearing on charts of liquid securities.
Below I mapped out one possibility for how larger wave B (shown as purple line above on the original post's chart) could unfold. The light blue line below shows the possible way in which the subwaves of Wave B could progress. It would seem quite possible that HD has just finished subwave 2 (corrective) and started subwave 3 down this morning—gaps are often (not always) apparent in wave 3. Next week likely sees sizeable bounce, perhaps back to the green downtrend line shown on my original chart above. Then wave 5 could easily finish at a Fibonacci 1.00 extension of wave A as projected from the start of Wave B.
OptionsRising also posted this morning a good update with a technical-analysis counterargument, which is based on RSI and other technicals for why a bounce might be overdue. Check that out and keep that in mind as part of the overall context. Current prices today may not be the best place (from a risk-reward perspective) to enter the trade.
Catatan
Zooming in on the price action today, here is a 15m chart showing Elliott Wave patterns that could be under way. First, this update will discuss the price action within Wave C, the final wave (intermediate term) of an apparent A-B-C correction starting at the ATH of 420.61.To view the longer-term Wave C discussed in more depth below, view the original posts chart. Wave C is part of the dark purple A-B-C corrective pattern drawn.
Within wave C (wave C is typically 5 waves), it appears that Wave C's sub-wave 1 has completed, leaving sub-waves 2-5. The next part of the analysis—addressing sub-wave 2 within Wave C— seems less clear b/c two alternatives are probable:
[See the area encircled by the ellipse]
(1) Wave C's sub-wave 2 may already be complete. Under this interpretation, Wave C's sub-wave 2 (light blue) divides further into an ABC corrective pattern as shown by the very light purple A-B-C corrective pattern below.
(2) But the pattern leaves open the possibility that Wave 2 may still be underway. Many corrective patterns (such as flats) have 3-3-5 wave structure. If this type of structure applies, then the A-B-C corrective pattern within Wave C's sub-wave 2 could be halfway formed leaving as shown by the darker purple A-B-C corrective pattern below. In short, sub-wave 2 may need to form another corrective wave c higher to be complete. Both interpretations seem reasonable, and clarity will come in the next few days.
My best guess b/w these two alternatives—this is just a best guess—is that sub-wave 2 has already completed. Larger Wave C's sub-wave 3 has begun with the gap down today (4/6/21). Note that this sub-wave 3 should have 5 waves as it would be motive (not corrective), and today's price action (4/6) was little wave 1 and 2 of sub-wave 2 of Wave C. (Sorry, that's a ridiculous mouthful, thanks to Ralph Nelson Elliott, founder of this theory.)
Catatan
If my "best guess" that sub-wave 2 is complete (which is alternative (1)in the update above) is correct, and that sub-wave 3 is underway, here is a possible price path for sub-wave 3 of Wave C (see teal-colored 5-waves within sub-wave 3 show within the ellipsis below):Catatan
The bounce today is still within the more probable alternative I described yesterday, and today's rally could still be part of sub-wave 3 (which includes 5 waves) down, and today's rally looks like it could be finishing the second smaller wave 2 within sub-wave 3 of Wave C.However, if 309.10 is exceeded to the upside (See blue line on below chart), then the alternative scenario is more probable. The alternative scenario, just to clarify, is that sub-wave 2 needs another leg higher to complete its corrective pattern.
Catatan
Updated chart with comments below: Alternative 2 discussed above appears to be the more probable scenario. Sub-wave 2 (blue line) of larger Wave C (dark purple A-B-C pattern starting at the 420 ATH) appears to be tracing out another corrective leg higher, perhaps as an expanded flat. I had described this as one of two alternatives. So my best guess yesterday (Alternative 1) that sub-wave 2 had completed was wrong.
What is updated? It appears that sub-wave 2 (blue line) is dividing into a more extended corrective pattern (light purple A-B-C pattern shown on this updated chart) rather than a simple smaller zigzag. See the blue circle. My drawing is hypothetical to show how the extended corrective pattern could unfold. The one I drew was an expanded flat: wave C in an expanded flat ends much higher than the end of wave A. So this is how sub-wave 2 of larger Wave C *may* unfold.
So subwave 3 by inference (blue line) of larger Wave C has not yet begun downward as I had suspected.
The downtrend line is still respected, and provides a good entry. I am looking for resistance around 318-321 to increase my current 1/3 position, so long as the trendline remains intact and other evidence still supports HD's solid downtrend structure.
Catatan
Scaling into the HD position a bit more today. HD failing at resistance at 21-day EMA today, which is not far below the down trendline (green) above. And the corrective pattern comprising sub-wave 2 of Wave C looks as if it could be completing, though corrective patterns can become complex combinations that take more time / sideways action to form. This trade expires 5/20/22. Using a put debit spread 20 pts. wide. Point of invalidity is a close above the trendlineCatatan
This looks like another potentially good entry for a bearish play on HD, using the bearish thesis above. Of course, if the indices and HD reverse higher into the close, that would invalidate this entryCatatan
HD after posting better than expected earnings today plunged below its trendline yet again. Where it closes remains to be seen. My 265 target remains intact. Note: I have adjusted the trendline slightly to account for the lengthy April 2022 consolidation (nearly 1 month consolidation).
Trendlines can be subjective, and new price bars can always reveal where a trendline "should have been." This is why trendlines alone should be flexible and considered with other technical evidence.
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Two targets were given: $265 and $215. The time frame was about 2-3 months. It appears that one target was reached at $265. The other target was not reached within the 2-3 month time frame discussed in the original post.
SquishTrade
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Informasi dan publikasi tidak dimaksudkan untuk menjadi, dan bukan merupakan saran keuangan, investasi, perdagangan, atau rekomendasi lainnya yang diberikan atau didukung oleh TradingView. Baca selengkapnya di Persyaratan Penggunaan.