Both Newfield Exploration and Pioneer Natural Resources are trading near trendline resistance, and a...
Can't Keep a Strong Sector Down
02/13/2013 10:35 am EST
Recent housing starts and construction payroll data suggests that the housing recovery is gaining strength, and MoneyShow’s Tom Aspray examines the charts for new opportunities.
After its best January in ten years, the Dow Industrials continued higher Tuesday and is just 1% below its all-time highs. Though Tuesday’s gains in the Dow and S&P 500 were minor, the A/D and Up/Down volume ratios were almost 2 to 1 positive. The Nasdaq 100 was lower for the day.
The short-term sentiment on Wall Street is skittish to say the least as many feared that stocks would drop sharply after the State of the Union message but so far the futures are actually up slightly. If we get one sharp down day, I would look for a wave of bearish sentiment in the financial media.
Both the NYSE A/D line and the short-term A/D indicators are still rising, which is a positive sign. The ranges have quite narrow so far this month and typically there would be an increase in the daily ranges before a top was complete.
One of the strongest sectors since they flashed a volume buy signal in October 2011 has been the home building or the home construction stocks. The leading home building ETFs and home building stocks have been correcting in February but surged Tuesday on a bullish home sales report.
The short-term technical outlook and increasing volume suggests the correction is over but are there any new opportunities for investors or traders?
Chart Analysis: The long-term weekly chart of the Dow Jones Home Construction Index shows that the 38.2% resistance was overcome several weeks ago.
- Using basic Fibonacci analysis, this makes the 50% resistance at 612.75 as the next target, which is over 21% above Tuesday’s close.
- There is short-term trend line resistance in the 535 area.
- The relative performance bottomed in 2011 and then overcame major resistance, line a, in the middle of 2012.
- The weekly and daily RS lines are now back above their WMAs.
- The weekly OBV formed a bullish divergence at the 2011 lows (line 1) and is turning up from support.
- There is initial support now in the 485-495 area.
The SPDR S&P Homebuilders (XHB) has several of the larger home builders but also Whirpool (WHR), Tempur-pedic (TPX) and Lumber Liquidators (LL). XHB dropped below the 20 day EMA last week and tested the $28 level.
- The daily chart shows stronger support in the $27-$27.30 area, lines c and d.
- The relative performance held above support, line f, and has now moved back above its WMA.
- The weekly RS line has turned up from its WMA, so the multiple time frame RS analysis is positive.
- The daily OBV has turned up from daily support, line g, as it has held well above its uptrend (line h).
- The weekly OBV (not shown) is turning higher and is also above its WMA.
- There is monthly pivot resistance at $30.54 with the monthly starc+ band at $30.85.
NEXT PAGE: 2 Strong Stocks in a Strong Sector|pagebreak|
Toll Brothers Inc. (TOL) peaked at $38.36 at the end of January and then hit a low last week of $35.03, which was an 8.7% drop from the high. Very strong close Tuesday on increasing volume suggests that the correction is now over.
- The quarterly R2 pivot resistance is at $40.15 with the monthly starc+ band at $41.30.
- The daily chart shows that the downtrend, line a, was broken in early January.
- The relative performance has been in a solid uptrend from the December lows (line c) and has just moved back above its WMA.
- The daily on-balance volume (OBV) broke its downtrend (line d) in the middle of December and held above its WMA on the recent correction.
- The weekly OBV (not shown) is also above its WMA.
- The monthly pivot is at $36.27 with further support now in the $35 area.
M/I Homes (MHO) peaked at $29.07 in early January and then was hit hard after it reported earnings on January 31. Though MHO met revenue expectations, its earnings were $0.23 per share versus the $0.29 consensus estimate.
- The stock dropped to a low of $22.28 Monday, which was a decline of 23.3% from the highs.
- The uptrend that connects the June and November lows was slightly broken over the past few days with additional support in the $22 area.
- The relative performance has turned up from support at line g but is still below its WMA.
- The OBV has also turned up but is still below its WMA, while the weekly is well above its WMA.
- The declining 20-day EMA is now at $25 with further resistance at $26.40.
- There is stronger resistance at $27.37 and then major at $28.70.
What it Means: Though one day’s action is not conclusive, the weekly analysis for the homebuilders and their ETFs continues to look strong. This is a positive sign for the intermediate-term uptrend.
In late November’s column Watch This Seasonally Strong Sector, I discussed how the homebuilders typically bottom in October-November and then rally until April-May.
Traders should look to buy MHO for a quick rally back towards the recent highs.
How to Profit: For M/I Homes (MHO), go 50% long at $23.52 and 50% long at $23.16, with a stop at $21.93 (risk of approx. 6.1%). Cancel if $24.60 is hit first. Sell ½ at $26.34 or better.
Portfolio Update: Should be long the SPDR S&P Homebuilders (XHB) at $25.64 and use a stop now at $27.82. Sell ½ at $30.42 or better.
Should be long Toll Brothers Inc. (TOL) at $30.34 and use a stop now at $33.88. Sell ½ at $39.33 or better.
Editor’s Note: If you’d like to learn more about technical analysis, attend Tom Aspray’s workshop at The Trader’s Expo New York, February 17-19. You can sign up here, it’s free.
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