Stock Of The Day: Home Depot Flashes Buy Signal As Earnings Beat Expectations

The Home Depot, Inc. HD is trading higher after posting strong earnings. The company reported $3.78 per share on revenues of $40.22 billion. Both of these were higher than estimates. Home Depot also said it is projecting comparable sales to fall by 2.5%, instead of the previously anticipated 3% to 4%.

In addition to these strong fundamentals, the stock may have just had a classic technical analysis buy signal. This is why it is our Stock of the Day.

A simple moving average price is the average of recent closing prices. For example, a 20-day simple moving average is the average closing price of the prior 20 days. A 30-day simple moving average is the average closing price of the previous thirty days, and so on.

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If the short-term moving average price of a stock is greater than a longer-term moving average price, there is a good chance the stock is in an uptrend. If a short-term moving average price is lower than a longer-term average price, there is a good chance the shares are moving lower.

Moving average crossover strategies are very common on Wall Street. They are entirely objective and easy to backtest.

With these strategies, a buy signal is given when a short-term moving average crosses above a longer-term average. If this action occurs, there is a good chance a new uptrend is forming.

A sell signal is generated if the short-term average price crosses below a longer-term one. If this happens, there is a good chance that a downtrend is forming.

On the Home Depot chart, the blue line is the 5-day moving average and the red line is the 12-day average. In August a buy signal was given when the shares were trading around $362. A sell signal was given in September when they were close to $368.

Then in mid-September, a buy signal was given around $373. On October 22, a sell signal was given when the stock was trading around the $400 level.

As you can see, a buy signal was given three days ago. The 5-day simple moving average has once again crossed above the 12-day. This could mean a new uptrend is in the process of forming.

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