HD likely to head lower based on Elliott Wave, Other TechnicalsPrice / Trend
The proper starting point for technical analysis is always price , as many expert technical analysts teach. One major consumer discretionary stock, Home Depot NYSE: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 ( SP:SPX and NASDAQ: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, NYSE: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.
