Over the last four weeks, we’ve observed a general rotation from traditionally offensive sectors like technology and consumer discretionary to more defensive sectors including real estate and consumer staples. One of the top weights in the consumer discretionary sector, Home Depot , may soon confirm a bearish price pattern that implies much further potential downside for this home improvement retailer. One of my favorite ways to measure “offense vs. defense” is to chart the ratio of consumer discretionary to consumer staples. Basically, we are comparing “things you want” to “things you need,” with the idea that when people are optimistic about the economy and have money available, they will spend on discretionary purchases like travel and luxury goods. This ratio has been favoring offense since August 2024, providing a clear sign of optimism for the US economic growth. But since a peak in mid-January, the Consumer Discretionary Select Sector SPDR Fund has underperformed the Consumer Staples Select Sector SPDR Fund (XLP) . This rotation was mainly driven by a breakdown in two of the leading weights in the XLY, namely Amazon.com and Tesla , while many stocks in the consumer staples sector experienced a strong upside reversal. I’m also showing an equal-weighted version of this ratio in the bottom panel, which actually continued higher into early February. But after the consumer staples sector began to improve earlier this month, the equal-weighted ratio also has now clearly turned lower. This confirms a clear rotation into the consumer staples sectors as investors have rotated to more defensive positions. Home Depot, currently the third largest weight in the XLY behind AMZN and TSLA, is now featuring a potential head and shoulders topping pattern. When HD achieved a new high in November, this move came on weaker RSI readings, creating a bearish momentum divergence. The lower price high in January suggested a lack of willing buyers to push Home Depot to yet another new all-time high. With a head and shoulders pattern, the most important level is the “neck line” formed by connecting the swing lows between the head and the two shoulders. If HD is unable to hold this key support level, then the pattern would suggest significant further downside. It’s also worth noting that the neckline lines up almost perfectly with the 200-day moving average, providing even more significance to support around $380. The weekly chart of Home Depot provides a longer-term perspective to the recent pullback, featuring a weekly PPO sell signal in December 2024. This bearish indication has often provided an effective warning sign that the previous bullish phase was most likely ended. The most recent sell signal, in early April 2024, saw HD drop down to an ascending 40-week moving average before the uptrend resumed. That means that we have already experienced a similar pullback in 2025, with Home Depot currently testing support at this key long-term barometer. One thing I’ve learned through previous bear market cycles is that the initial selloff often looks like a very buyable pullback. What separates the brief pullbacks from the more significant drawdowns usually comes down to whether prices are able to hold important support levels after the initial drop. For Home Depot, a push below the crucial $380 level could mean much further deterioration in store for this big box retailer. -David Keller, CMT marketmisbehavior.com DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
