Hot Action in Home Depot

 | Aug 16, 2011 | 1:18 PM EDT
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Home Depot (HD) is the top gainer in the Dow Industrials today. The stock is surging on heavy trade after this morning's second-quarter earnings report.  Investors jumped on shares in the pre-market, sparking a powerful gap-higher open that lifted shares more than 5%. Volume is running very heavy, and this will be the stock's fourth straight above-average positive day. The surge today extends an impressive recovery from last week's extremely oversold condition.

The rollover in late July gained steam once HD fell below its 200-day moving average. Throughout July, volume remained well below average while the stock held near the upper end of its 2011 range. When volume returned during the last week of July, it was all downside, leaving behind an important midterm top near $37.25. The aggressive selling continued into early August, and by the beginning of last week it had reached triple its daily average. The extreme downside momentum pushed HD to its most oversold level since the October 2008 lows.  

On Thursday, the rebound began with an impressive key reversal. HD opened with a gap-lower open but finished the day with a 5.4% gain on very heavy trade. The pre-earnings trade remained very positive, with another two days of gains totaling 4.5% as trade levels stayed well above average. With the addition of today's ramp, HD is now 15% above last week's lows and may have left behind a major bottom in the process.

HD, Daily

At this morning's highs, HD has reached its June lows. Prior to the collapse earlier this month, the $33.50 area was the stock's 2011 lows. I expect this area to offer considerable resistance in the near term. Considering the big move off the lows in just the last four sessions, a pullback from this resistance zone is likely.  A fade back down to yesterday's highs would fill the powerful breakout gap reaching key near-term support at the same time.

I am not in HD at this point, and I'm hesitant to chase the stock above the $32 area. A light-volume retreat down to $31.50 would allow for a much-lower-risk entry. I will be a light buyer at this level and will look to add as conditions improve. It's quite possible that HD left behind a major bottom this month and will eventually, after more basing action, make a run into the $35 area.

Columnist Conversations

we like this chart here, it appears ready to move higher. BOUGHT BZUN OCT 35 CALL AT 3.40
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