Home Depot, Dillards Trade Overbought into Earnings

From fashion to home fix-it, retail stocks have been among the favored destinations for investors seeking exposure to an improving economy. And with retail stocks like Home Depot (NYSE: HD) rallying to new highs on Friday ahead of a scheduled quarterly earnings announcement on Tuesday, the stock market has rewarded these investors with significant gains. Shares of Home Depot are up more than 4% in February, after rallying from a four-day pullback that took the stock into technically oversold territory.

Strength on Friday has also cost Home Depot a one-point intraday downgrade, making it increasingly likely that the stock could trade at “consider avoiding” levels on further closes in overbought territory. Shares of Home Depot began the week technically overbought and ended the week trading just inside those levels.

With Home Depot reporting earnings on Monday, traders should be alert to the potential of that announcement serving as a catalyst. Now that the stock is technically overbought, a quick reaction to the stock’s recent new highs would not be atypical.

Also reporting quarterly earnings next Tuesday is Macy’s (NYSE: M). Macy’s was trading at new, 52-week highs just over a week ago, and the stock has trended lower in the short-term as traders and more active investors took profits. In fact, it was the pullback during which Macy’s closed lower for three out of four sessions, finishing in technically oversold territory, that set up the stock’s latest two-day move back to the upside.

Early in its snapback rally, Macy’s still has neutral ratings of 5 out of 10 ahead of trading on Tuesday after rallying by more than 2% on Friday.

Up more than 5% to close back in bull market territory was another higher-end retailer, Dillard’s (NYSE: DDS). The three-day rally that has brought the stock above its 200-day moving average for the first time in 2012 has also created short-term overbought conditions in DDS. In fact, Dillard’s has developed a short-term, negative edge of just over half a percent.

Other retailers announcing earnings early next week include Walmart (NYSE: WMT), which we highlighted yesterday, and has been short-term rangebound over the last several days. And scheduled to announce quarterly earnings on Wednesday is Limited Brands (NYSE: LTD). LTD is trading just inside of overbought territory above the 200-day moving average after closing higher for the fourth day out of the last five.

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David Penn is Editor in Chief of TradingMarkets.com