Homebuilders Targeting New Highs

Apr. 27, 2012 1:13 PM ETXHB, TOL, BZH, PHM
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Tom Aspray, professional trader and analyst was originally trained as a biochemist but began using his computer expertise to analyze the financial markets in the early 1980s. Mr. Aspray has written widely on technical analysis and has given over 60 presentations around the world. Many of the technical indicators that Mr. Aspray wrote about in the 1980s, such as the MACD, have since gained worldwide acceptance. Tom is regular contributor to Forbes where he writes a regular Week Ahead column.  His expertise as a technical analyst has been acknowledged by the WSJ as well as some of the best known technical analysts.

Homebuilding stocks are setting up for a run to significant new highs in the months ahead, and now is the time to manage existing positions and look to initiate new buying.

The surprising 4.1% surge in pending home sales on Thursday caused a volume surge in the homebuilding stocks, and most closed sharply higher. It was the best pending home sales number since April 2010 and the stock market paid much more attention to this report then the somewhat disappointing data on unemployment claims.

Earlier in the week, the S&P/Case-Shiller housing price index showed a slight improvement, while the new home sales were lower than expected. In late March (see "Don't Buy the Homebuilders Now"), the daily technical studies suggested that these stocks would correct, but since the weekly analysis was bullish, it should present a buying opportunity.

As reported by the Wall Street Journal, in some parts of the country, buyers are competing for the same house through bidding wars. The paper reported that a Seattle buyer offered $23,000 above the $357,000 asking price, waived inspections, and still did not get the house.

This changing sentiment may have boosted the volume on Thursday, which indicates that the correction in the homebuilding stocks and the SPDR S&P Homebuilders ETF (XHB) is over. Even though it is not yet clear that the overall stock market correction is over, the homebuilding stocks are likely to make significant new highs in the coming months.

Now is the time to mange existing long positions in the homebuilders, and for aggressive investors, there is one low-priced homebuilding stock that looks attractive for new positions.

Click to Enlarge

Chart Analysis: The SPDR S&P Homebuilders ETF (XHB) peaked in March at $21.99 and then dropped just below the $20 level (line a) three weeks ago. Since the October 2011 lows, XHB is up 75% versus just over 30% for the Spyder Trust (SPY).

  • A strong weekly close above the prior two-week high at $21.18 will suggest a move to resistance in the $24.41-$24.90 area, which corresponds to the 2008 highs
  • Relative performance, or RS analysis, broke through major resistance, line b, in early 2012. The uptrend, line c, indicates XHB is still outperforming the S&P 500
  • Weekly on-balance volume (OBV) broke through resistance, line d, ahead of prices
  • The pullback in the OBV has held above its uptrend, line e, and it may close back above its weighted moving average (WMA) this week
  • Minor support now in the $20.50-$20.80 area.

PulteGroup (PHM) surged over 10% on Thursday amid volume of 22 million shares after it beat estimates for both earnings and revenues. PHM peaked at $9.69 on March 16 before correcting to a low of $7.65, but it did hold above the 38.2% Fibonacci retracement support level at $7.25. PHM looks ready to close at a new weekly high.

  • From the 2010 high of $13.91, the major 61.8% Fibonacci retracement resistance is at $10.50 with additional chart resistance starting at $10.70
  • Weekly relative performance is very close to overcoming the resistance, line i, which goes back to late 2010
  • The break of the long-term downtrend in the RS, line h, helped identify the lows last fall
  • Weekly OBV has turned higher from its rising weighted moving average. The OBV completed a major bottom in December when it overcame resistance at line j
  • There is initial support now at $8.50-$8.80

Click to Enlarge

The daily chart of Toll Brothers (TOL) shows a broad trading range, lines a and b, so far in 2012. The upper boundaries are now in the $26 area, and TOL had a high of $28 in 2008.

  • The correction held above the support in the $22-$22.30 area and did not come close to 38.2% retracement support at $20.50
  • The RS is now on the verge of breaking out of its four-month trading range, lines c and d
  • Daily OBV has closed back above its negative divergence resistance at line e. This is consistent with a resumption of the uptrend
  • Weekly OBV (not shown) is positive and has turned up from its weighted moving average
  • There is now first good support for TOL in the $22.50-$23 area

Beazer Homes (BZH) is a $230 million, small-cap builder of lower-priced single- and multi-family homes in 16 states. The company will report earnings on Wednesday, May 2. The 50% support at $2.67 was tested in March.

  • The 61.8% Fibonacci retracement support is at $2.35
  • Daily chart shows a flag formation, lines f and g, and a close above $3.50 will complete the formation
  • The 127.2% Fibonacci price target is at $4.40, and BZH made a high in early 2011 at $6.23
  • Daily RS line has turned up from support at line i. A move through the downtrend, line h, should confirm that the correction is over
  • Daily OBV shows a similar pattern, as it recently pulled back to support at line k. The OBV has moved back above its weighted moving average with key resistance at line j
  • There is minor support now in the $2.80-$2.96 area.

What It Means: As I detailed in a late-February Trading Lesson, the high bullish sentiment and warning signs from the daily technical studies suggested that the homebuilders were likely to correct. The strong weekly analysis indicated that a decline would be a buying opportunity.

The weekly and daily technical studies now indicate that the homebuilders' correction is over. Therefore, it is prudent to raise the stops on long positions and plan where to take initial profits on current positions. Aggressive traders should look to buy Beazer Homes (BZH) at lower levels.

How to Profit: Aggressive traders should go 50% long Beazer Homes (BZH) at $2.92 and 50% long at $2.70 with a stop at $2.47 (risk of approx. 13%). On a move above $3.33, raise the stop to $2.64 and sell half the position at $4.36 or better.

Portfolio Update

  • For the SPDR S&P Homebuilders ETF (XHB), buyers should be 50% long at $20.28. The second buy level at $19.56 was missed. Use a stop at $19.52
  • For PulteGroup (PHM), buyers should be 50% long at $8.16 and 50% long at $7.68. Raise the stop now to $7.55 and sell half the position at $10.34 or better
  • For Toll Brothers (TOL), buyers should be 50% long at $22.48. Raise the stop now to $22.66
  • In March, I recommended going 50% long KB Home (KBH) at $10.18 and 50% long at $9.46. Both positions were stopped out at $8.88 for a 9.6% loss.

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