Friday, November 05, 2004

Floors Put In by Some Homebuilders

RealMoney by TheStreet.com

Friday November 5, 11:00 am ET
By Dan Fitzpatrick, RealMoney.com Contributor

In late September I wrote that the homebuilders seemed due for a pullback. While the sector did pull back significantly in October, many of the stocks have been returning to their bullish ways. So I thought I'd feature the group again to get a sense for where they are trading within a weekly period time frame.

I'm also changing up the indicators and time settings in preparation for TheStreet.com's Technical Analysis Seminar this weekend just outside New York City . There I'll be looking at a few new ones, so I thought I'd get a jump on the action today. You'll notice that I've substituted Williams %R for RSI, and the period is 28 rather than 14. There are some nuances to the indicator, but it is still a pure overbought/oversold indicator.

I've also changed the money flow period from 10 to 20 periods. This gives a smoother signal than my usual 10-period setting.

Let's get to the charts.

Pulte

After the big selloff last month, Pulte (NYSE:PHM - News) looks like it has cleared out much of the selling and is now starting to repair some damage. But we can see from money flow that this selling pressure remains pretty strong. Notice how the accumulation-distribution line had been warning of a selloff, making a lower high in late September vs. the high during the first quarter of 2004? So, if this stock is really reversing the uptrend, we should see Williams %R make a lower high now. Watch for it.

Ryland Group

After a pullback to the mid-$80s, Ryland (NYSE:RYL - News) has pushed to a new high. All of the secondary indicators are confirming the breakout. My bet is that this stock will begin the next leg higher very soon. If I were long, I'd place a stop at $85 or so.

D.R. Horton

D.R. Horton (NYSE:DHI - News) has been range-bound for the past year, but that range has been quite broad. But look how the most recent high in %R was lower than the previous highs. This most recent high did not make it above -20. That's a negative divergence, and worth paying attention to.

Right now, though, there is no real edge here. The stock is in the middle of a $10 trading range and the stock is only at $31, so I'd be inclined to buy at support and sell at resistance. Breakouts are just too risky because of the wide trading channel. By the time D.R. Horton gets up to $35 to break resistance, too many shareholders are itching to take profits. That makes for a failed breakout.

KB Home

KB Home (NYSE:KBH - News) broke above resistance in late September, fell back to test that breakout and is now moving back to a new high. This stock is just on fire. The accumulation-distribution line shows a significant uptrend, and money flow reveals very strong buying pressure. However, notice how the most recent peak in money flow is much lower than the previous peak. That's a negative divergence, and a bit troubling. So buying pressure may be starting to wane a bit. I'd keep stops tight on any long positions. There's no sense letting profits slip away.

Toll Brothers

Toll Brothers (NYSE:TOL - News) has been consolidating for the past year. As with many others in the group, the stock has been range-bound, just waiting to pick a clear direction. My bet is that the next move will be higher. Buying pressure remains strong, and the accumulation is evident: The accumulation-distribution line is at an all-time high. I'd keep a looser stop on Toll Brothers -- say, right around $42 or so.

Be careful out there.

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