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Charts point to a big breakout for Dow stock Home Depot, technician says

Chart points to big breakout for major Dow stock

As the homebuilders begin to show signs of life, one top technician says it's Home Depot that's gearing up for an even bigger breakout.

The XHB ETF that tracks the homebuilders, has jumped more than 7 percent after hitting its lowest level of the year in May. According to Carter Worth, head of technical analysis at Cornerstone Macro, the rally may just be getting started.

Worth first references a chart of the 10-year Treasury yield, which has surged more than 23 percent since January. A rising yield, which moves inversely to bond prices, tends to hit homebuilders the hardest due to its correlation with fixed-mortgage rates.

However, despite a major run-up into the year, the 10-year yield has fallen more than 4 percent from its May high of 3.1 percent. Worth's analysis suggests the move below a key uptrend level implies the rally in rates could be overdone.

"I think the takeaway here is that after a well-defined bounce off trend, we have undercut," Worth said Friday on CNBC's "Options Action." "It has all the look of a [bearish] topping-out formation."

Conversely, Worth references the recent weakness in the homebuilders ETF, which is now down nearly 13 percent from its multiyear high in January. Nonetheless, Worth believes the ETF's recent break above a key $38 level could be setting the group up for a bullish reversal.

"Once you break trend in principal, [you can] make the bet that it will continue," he said. The XHB ETF has rallied more than 7 percent from its lows in May, and more than 11 percent from its 52-week low.

Home Depot, the third-largest holding in the XHB, also has shown signs of resurgence. The Dow stock fell to an eight-month low in March but has soared back, now up more than 18 percent since.

Worth pointed out that shares of Home Depot have seen just three double-digit drawbacks over the last two years, all of which the stock has managed to recover from. Worth believes this reoccurring bounce off a key uptrend level suggests the Dow stock is poised to "ultimately make a new high."

"I want to play Home Depot on the long side," he said.

Shares of Home Depot are up 31 percent in the past year and were higher Monday afternoon at around $200.