Is It Time to Buy the Homebuilders?

12/21/2010 9:47 am EST

Focus: OPTIONS

Thomas Aspray

, Professional Trader & Analyst

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Chart Analysis: The homebuilding stocks have been performing well recently and the Dow Jones Home Construction industry group moved above four-month resistance on Monday. Volume has picked up, which is also a plus. There is additional resistance at 260 with the 50% retracement resistance in the 275 area, which is just over 8% above current levels. There is initial chart support in the 247-250 area. Many of the home construction stocks, like M/I Homes (MHO), Beazer Homes (BZH), KB Home (KBH), Lennar (LEN), and others show solid double-digit gains for the month.

The chart of KBH shows that it has just closed above the resistance in the $13.40 area. There is long-term converging resistance in the $19-$19.50 area. The daily chart shows initial support now in the $12.80-$13.20 area with the 20-day exponential moving average (EMA) at $12.20. The daily on-balance volume (OBV) is still below trend line resistance and stronger volume is needed to confirm higher prices.

What It Means: The recent strength in the home construction stocks suggests this group could have formed a bottom. Most of the home construction stocks that are acting stronger than the group average are overextended on a short-term basis. KB Homes (KBH) is one stock to watch, but a bottom has not yet been confirmed. KBH pays a dividend of 1.85% and has over $10 in cash per share, which doesn't hurt.

How to Profit: KBH needs to see more volume as it moves higher, preferably over 5 million shares a day. If it can move above $14 on increasing volume, I would then look for a pullback to the $12.90-$13.30 area for a buying opportunity and would place a stop at $11.95. If $14.75 is hit first, cancel the buy order and reassess.

Tom Aspray, professional trader and analyst, serves as senior editor for MoneyShow.com. The views expressed here are his own.

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