Tuesday's early decline in the stock market was again well supported, as the major averages closed well off the day's lows. The futures are strong in early trading, with the S&P 500 futures up more than six points.
Though many of the technical studies turned lower yesterday, there are still no sell signals or signs of a significant top. They do allow for more choppy trading, as the seasonal tendency is for the S&P 500 to form a short-term high on March 21, then decline into the end of the month.
The oil stocks were hit hard on Tuesday, while the housing sector was one of the stronger groups. The housing starts rebounded nicely in February after January's sharp drop.
Monday's Housing Market Index was a bit weaker than last month. On Thursday, we get the latest data on existing home sales, which is expected to improve only slightly because there is a lack of supply. Today, of course, the market is waiting for the FOMC announcement this afternoon and then Fed Chairman Ben Bernanke's press conference.
A technical look at the Home Construction Index and three of the key homebuilding stocks can help determine whether this is a sector investors should be buying.
Click to Enlarge
Chart Analysis: The Dow Jones Home Construction Index broke its downtrend in late 2011, as the volume surge in October 2011 suggested a change in trend.
- Since the start of 2012, the index is up 104%. The weekly chart shows a swell defined uptrend (line a).
- The weekly Starc+ band was tested in September and January, and both tests were followed by corrections.
- There is next support now at 452 and then 436.
- The relative performance broke its longer-term downtrend (line b) in early 2012.
- The RS line did confirm the recent highs and is holding its uptrend (line c).
- The weekly Starc+ band is now at 549, which is about 10% above current levels.
Toll Brothers (TOL) came quite close to its weekly Starc+ band in the middle of January, hitting a high of $38.26 before it corrected to a recent low of $33.09. This was a correction of over 13%.
- The quarterly pivot is at $32.66, the weekly uptrend (line d) is at $31.65, and the weekly Starc- band waits at $30.49.
- The 38.2% Fibonacci retracement support from the 2011 low is at $28.85.
- The relative performance did confirm the recent highs (line e), but subsequently dropped below its uptrend (line f)
- The weekly OBV formed a negative divergence at the recent highs (line g). The OBV is now testing its uptrend (line h), and a drop below the December lows would be more negative.
- A close above the resistance at $35.76 to $36.20 would be a short-term positive.
Lennar (LEN) peaked at $43.22 in early February, and then dropped to test its uptrend (line a), reaching a low of $36.61.
- The quarterly pivot at $37.93 was violated on the correction, though LEN is now back above it.
- Calculated from the January highs, the 38.2% support sits at $31.30.
- The uptrend in the relative performance (line b) was also broken on the correction. The RS line has now rebounded back to its WMA, so this week's close will be important. A lower close could indicate the rebound is over.
- The weekly OBV is acting better-it is above its WMA and testing resistance (line c). There is important support for the OBV at line d.
- The daily OBV (not shown) formed a negative divergence at the January highs.
- The next resistance stands at $42.68 to $43.18.
DH Horton (DHI) made a new high this week at $24.76 with the weekly Starc+ band now at $26.46.
- The major 61.8% retracement resistance is $28 based on the 2008 high of $42.82.
- The relative performance is trying to break out to new highs, as it is testing resistance (line f).
- The RS line is holding well above its long-term uptrend (line g).
- The weekly on-balance volume (OBV) broke out to new highs two weeks ago, overcoming resistance (line h). The OBV is well above its WMA and the uptrend (line i).
- There is initial support now at $23.30 and then $22.45. A break below the February low at $21.35 would be negative.
What it Means: I expect that the fundamental case for the homebuilders will continue to be strong, especially as the inventory of existing homes continues to decline. The weekly analysis of the Dow Jones Home Construction Index is still positive, but this would change on a drop below the recent lows.
The outlook for the three homebuilders is quite different. Toll Brothers (TOL) looks the weakest based on the RA and OBV analysis. The RS analysis for Lennar (LEN) is also a concern. Technically, DH Horton (DHI) looks the best, but it is too far above the good support at $21 to $21.35.
After such dramatic gains, I would look for a long period of consolidation before doing new buying. On a seasonal basis, the homebuilders typically top at the end of April.
How to Profit: No new recommendation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.