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Once out-of-favor homebuilding stocks have been on a torrid run, but seasonal weakness and extreme bullishness are likely to produce a correction and more favorable entry points for patient investors.

In the first few weeks of 2012, there have been a large number of articles and headlines discussing the homebuilding stocks. The positive news on the housing sector so far in 2012 has turned even more analysts and investors bullish on this sector. Does that mean you should be buying now?

Clearly, sector selection was the key in 2011, and it should also be a key factor in your stock selection in 2012. From a technical standpoint, the homebuilders have had an impressive run since their volume surge in mid-October.

The strong action over the past two weeks has taken many homebuilding stocks close to strong resistance, and while there are no clear signs yet of a short-term top, one is increasingly likely in the next week or so.

The seasonal analysis of the homebuilding stocks indicates that they often correct during February, as I’ll discuss below. Even more worrisome is the high degree of bullish sentiment, which suggests current shareholders should be looking to take profits on their positions and then wait for a decent correction to re-buy.

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Chart Analysis: This chart of the homebuilding index analyzes data going back to 1998. Typically, the homebuilding stocks bottom in October and November, and you can see that the seasonal downtrend (line c) is broken during the latter part of October and then often retested in November before the uptrend is clearly established.

• This pattern fits this year’s action quite well, as there was a sharp pullback in this industry group the week of Thanksgiving before the homebuilding stocks accelerated to the upside
• On a short-term basis, you can see that the seasonal trend line turns lower during February and often bottoms out in the early part of March before the uptrend resumes
• Typically, the homebuilders will complete a major top in late April or early May and then decline during the summer months
• For this index, the next strong support level is in the 245 area, line a, which is about 10% below current levels
• The industry group has further resistance from early 2011 in the 290 area and then more important resistance in the 320-350 area
• The index had a high of 1063 in May 2005, so the major 38.2% retracement resistance is well above current levels and in the 490 area

NEXT: The Strongest Chart of All the Homebuilders

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