The Home Depot Inc. (HD) and Lowes Companies Inc. (LOW) update the do-it-yourself revolution next week with quarterly reports that highlight current conditions in the retail and housing sectors. Expect both companies to issue positive but somber fiscal year 2017 outlooks, with uncertainty following the U.S. presidential election keeping a lid on home buying and consumer spending.
Trump’s immigration policy could have a significant impact on revenues in coming quarters, with new home contractors relying on a large population of undocumented workers to keep their costs in check. Deporting these folks could drive up industry wages, raise home prices and generate a stiff headwind for first-time buyers. Home improvement stores should benefit if that happens because greater resources will be devoted to repairing and upgrading existing properties.
HD Weekly Chart (2013-2016)
The stock bottomed out at a 12-year low in the upper teens in 2008 and entered an uptrend that returned to 2000 resistance near $70 in 2013. The subsequent breakout generated outstanding gains in November 2015, topping out and dropping into a trading range bounded by the rally high and August 2015 low. Breakout attempts in April and August 2016 failed, with the most recent failure generating a sizeable decline to an 8-month low.
The stock turned sharply higher after the election, with price quickly recouping half of the 3-month downtrend. The reversal printed a lower low in the corrective pattern, adding to a bearish structure that should slow upside development. It’s now trading near the 50-week and 200-day EMAs, which are likely to act as magnets in coming days. The broad pattern is taking the shape of a rising wedge, with slightly higher highs and compressed lows. If so, a breakout will need to clear $140 before attracting sizeable momentum.
On Balance Volume (OBV) topped out in November 2015 and rolled over in a distributive phase that’s posted a series of lower highs. It turned higher this week at the same level as prior 2016 lows, signaling a floor that could mark the start of institutional accumulation needed for a healthy breakout. However, the correction triggered a sizable shareholder exodus and it will take substantial buying power to build a new sponsorship base.
LOW Weekly Chart (2013-2016)
The stock fell to a 7-year low at 13 in March 2009 and turned higher in a recovery wave that reached the 2007 high at 35.74 at the end of 2012. It then broke out, entering a strong trend advance that more than doubled the stock’s price into the February 2015 high at 76.25. It’s been rough going since that time, with price easing into a choppy correction that’s carved the outline of a bearish broadening formation, characterized by higher highs and lower lows.
Two sided trend killers have forced many market players to abandon the stock and look for opportunities elsewhere. Breakout attempts in November 2015, and July 2016 failed while a February breakdown reversed quickly, trapping overeager short sellers. A decline in November tested the 2016 low just ahead of a sharp uptick after the presidential election. Unlike its rival, LOW is still trading well below the 50-week and 200-day EMAs, opening the door to a decline that reaches the lower lows trendline and 200-week EMA at 60.
However, the stock shows a stronger OBV pattern, lifting to a new high during the summer rally and then pulling back into the fourth quarter. The indicator has also held well above the February low even through the price decline came within three points of the low this week. This loyal sponsorship should underpin the current bounce and allow the price to reach the range midpoint.
The Bottom Line
Home Depot and Lowes have been stuck in trading ranges since 2015, with next week’s earnings reports unlikely to trigger breakouts or breakdowns. The upside may improve in 2017 and beyond, especially if a tough immigration policy undermines new home sales, forcing a fresh wave of repairs and upgrades to existing properties.
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