Sector: Specialty Retail-Home Improvement
My 4th pick is a household name, Home Depot. Home Depot has shown exceptional price performance over the past year and a half. Most investing books will tell you to buy low and sell high. This is not generally bad advice, but there is some thought among traders that those stocks are low for a reason. The stocks that are performing the best and have the most buy support surrounding them are the ones making new all-time highs. The more progressive idea is to buy high, sell higher; the thought that buying strength is better than buying weakness. Now, I tend to feel that there are opportunities for both of these mentalities in our plans. Some set up nicely after moving lower and some are just so strong that there is no stopping them. Home Depot falls into the freight-train category. This thing has been ripping for over a year and so far has not sputtered much along the way. This is another stock I currently own and have just purchased more shares in the past week.
The reason behind Home Depot's surge has to do mostly with the improving housing market. New homes are being built at the highest rate since the recession in "08 and consumers are turning to Home Depot for their improvement needs. The healing housing market theme will resurface within our studies as I feel it is going to be one of the primary drivers to bring the US economy around.
However, the main reason I am invested in Home Depot is because of that stellar price performance!
The key to watch here is to see price stay above the lower trend line. As you can see price has tested that line 5 times in the past 1 1/2 years, the most recent test coming just a few days ago. When a stock is in such a clean trend channel, you can feel very confident about buying it when it touches the lower trend support. Our plan with this stock is to hold it as long as it stays above the lower trend support, adding to our current position each time it touches the lower support. And because the channel is so well defined on the upper end, we would look to take some profits any time it touches the upper resistance line. So you would buy shares on the lower trend line and trim off some at the upper trend line. As soon as price fails the lower trend support, we are done with it; exit the full position.
The reason we like to buy when the stock hits the support line is because that offers us the best possible risk/reward. We buy the stock and if the price just below where we bought fails, we can easily exit without taking much of a loss at all. That folks is the name of the game. Try to gain maximum reward while taking the smallest risk possible. The market will not always be so cut and dried, often times it will throw a curve ball just to mess with you. But that is when you revisit your trading plan and simply control your risk.
There are not too many stocks that come along and act perfectly for you, but when one does you must be prepared to take action. Home Depot is one of those stocks; enjoy the ride and follow it as long as its cooperative.
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