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There are two homebuilding stocks that I like the best. One is KB Home (KBH), which I recommended purchasing in October. The other is DR Horton (DHI) where there is a clear support levels which if reached should set up a good buying opportunity. Let’s take a look at each of these stocks.

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KB Home (KBH) hit a low last October of $5.02 and by last week had rallied back to the $13 area. KBH has already declined from last week’s highs with the 38.2% Fibonacci retracement support at $9.90 and the 50% support level at $8.97.

The RS line broke through its major resistance, line b, in January as KBH was leading the market on the upside. The daily OBV has broken its longer-term downtrend, line c, but has just dropped below its weighted moving average. The weekly OBV (not shown) is positive, and volume over the past six weeks has been strong.

Initial resistance now stands at $12.25, and if overcome, it could signal a rally to the 50% retracement resistance at $12.57. This is calculated from the 2010 high of $20.12. The 61.8% Fibonacci retracement resistance at $14.35 needs to be overcome to confirm that a major low is in place.

Strategy for KB Home (KBH): Go 50% long at $9.56 and 50% long at $8.78 with a stop at $8.18.

As per the October recommendation, buyers should have been long KBH from $7.04. Half of the position was sold at $9.90 and the other half was sold at $12.56, as recommended last week.

DR Horton (DHI) is another homebuilder whose long-term pattern suggests it will be an excellent buy at stronger support. The stock peaked in early February at $14.78 and is already testing first support just under $14. There is further support in the $12 area with the 38.2% retracement support at $12.22. The 50% Fibonacci retracement support level is at $11.42.

The RS line broke through significant resistance (line e) in October but started to diverge from prices in late January and early February. The daily OBV has broken its uptrend, line f, but did confirm the recent highs. Typically, this would suggest a rally back to the weighted moving average and then a further decline that should set up a good buying opportunity.

Initial resistance is at $14.50 and a close above $14.70 would indicate that new rally highs were ahead. There is resistance from 2010 at $15.44.

Strategy for DR Horton (DHI): Go 50% long at $12.32 and 50% long at $11.62 with a stop at $10.82 (risk of approx. 9.3%).

Of course, there are other homebuilders, like Toll Brothers (TOL), Lennar Corp. (LEN), and PulteGroup Inc. (PHM), which I will also be keeping an eye on.

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