Is Home Depot Inc (HD) On Its Way to Higher Highs?

After hitting its recent record high, Home Depot Inc (HD) pulled back to a key level of support

by Kirra Fedyszyn

Published on Sep 2, 2016 at 3:21 PM

DIY retailer and Dow component Home Depot Inc (NYSE:HD) hit an all-time high of $139.00 just over a month ago. Since then, the shares have pulled back roughly 3% -- last spotted at $135.00 -- to the site of their 80-day moving average. But a retreat to this level has historically been a bullish sign for HD, per data from Schaeffer's Senior Quantitative Analysts Rocky White. The stock has previously pulled back to this trendline seven times in the past three years -- a signal with an average 21-day return of 4.1%, and a positive 21-day return 86% of the time. And that's not the only sign the blue-chip stock could be headed back into record-high territory.

Along with support at the 80-day moving average, the stock could see assistance in form of heavy put open interest at the September 135 strike. Hedges related to these bearish bets could unwind as front-month option expiration approaches, giving the shares an extra boost.

And speaking of HD options, traders are still surprisingly pessimistic, given the stock's strong technical performance over the past several months. Specifically, the equity's 50-day put/call volume ratio across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) clocks in at 0.98 -- higher than 80% of all readings taken in the past year. Meanwhile, HD has a front-month gamma-weighted Schaeffer's put/call open interest ratio (SOIR) of 1.33 -- indicating puts actually outnumber calls by a healthy margin among near-the-money strikes in the September series.

Of course, considering HD's long-term ascent, some of the recent put buying could be attributable to shareholders seeking an options hedge. Regardless of motive, it's a particularly attractive time to pick-up HD's short-term options. The stock's Schaeffer's Volatility Index (SVI) of 13% is seated in the 4th percentile of its annual range, while its 30-day at-the-money implied volatility is just 1 percentage points from a 12-month low, at 13.5%. Together, these data points indicate premium on the stock's near-term options pricing in exceptionally low volatility expectations at the moment. Making the opportunity even more tempting for "vanilla" buyers, HD's Schaeffer's Volatility Scorecard (SVS) of 70 suggests the options market has tended to underprice the security's ability to make outsized moves over past year.

Outside of the options pits, Home Depot Inc (NYSE:HD) could stand to see some more love from the analyst crowd, as one-third of the brokerages tracking the shares are sitting on a "hold" or "strong sell" recommendation. Meanwhile, the company could see a business pick-up due to the unfortunate storms ravaging the South this year, with Louisiana flooded and Florida residents fending off Hurricane Hermine.

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