Where Are the Homebuilders Headed?

09/23/2014 10:30 am EST

Focus: STOCKS

Thomas Aspray

, Professional Trader & Analyst

The New Home Sales report for August—an important data point for the homebuilding industry group—comes out on Wednesday, so MoneyShow’s Tom Aspray takes to the charts to see if now is the time to be buying these homebuilder stocks.

Monday’s report that Existing Home Sales declined 1.8% in August hit a market that was already under heavy selling pressure. The declining stocks outpaced the advancing ones by a five-to-one margin.  This has dropped the McClellan oscillator to -184, which is just above the recent low of -194. The S&P 500 futures are showing significant losses in early trading as the disappointing data from France has pushed the CAC-40 down over 1.5%.

Though the NYSE Composite is now testing the September 15 low, the Spyder Trust (SPY) andA S&P 500 futures are still holding above the same lows.  A daily close in the futures below 1968 is likely to trigger additional selling in the overall market.

The gold miners were hit the hardest with the Philadelphia Gold/Silver Index down 2.86%, which was consistent with the negative outlook expressed on August 26. The iShares US Home Construction ETF (ITB) was not far behind as it was down 2.11%. It was also another rough day for the small-cap stocks whose weekly charts look the most vulnerable.

So what is the outlook for the homebuilding stocks? On Wednesday, we get the New Home Sales data for August, which is a more important data point for this industry group. Last May, I thought they were bottoming as the weekly studies appeared to have bottomed. The reversal in July took us out of our long positions and aborted the bottoming formations. Is now the time to be buying these stocks?

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Chart Analysis: The DJ Home Construction Index (DJUSHB) rallied back to long-term resistance, line b, in the 490 area last week before it reversed to the downside.

  • The daily starc- band is at 463 with the August low at 443.
  • The weekly starc- band is now at 434.
  • The daily relative performance is very close to breaking the support at line d.
  • This would be consistent with further selling in the homebuilders.
  • The RS line shows a well established downtrend, line c.
  • The volume was heavy last Friday with key OBV support now at line e.
  • On a move above 490 there is longer-term resistance in the 510 area, line a.

The iShares Dow Jones Home Construction ETF (ITB) is down 6.2% YTD after gaining 17.4% in 2013. It has 36 holdings in the portfolio with over 10% in Lennar Corp. (LEN) and D.R. Horton, Inc. (DHI).

  • The weekly chart shows a broad trading range, lines f and g, that goes back to late 2012.
  • ITB came close to its weekly starc- band in early August.
  • The rally last week tested the quarterly pivot at $24.20.
  • The quarterly support at $23.13 is now being tested with the August low at $22.
  • The relative performance broke long-term support, line i, in early July.
  • The RS line has turned lower from its declining WMA.
  • The weekly OBV is trying to hold its support, line j, that goes back to the 2013 lows.
  • The daily OBV is just barely holding above its WMA.

NEXT PAGE: 2 More Stocks to Watch

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Lennar Corp. (LEN) surged 5.8% on September 17 on over three times the average volume to close at $41.40.

  • The daily downtrend, line a, was slightly overcome as the daily starc+ band was tested.
  • LEN is up just 1.1% YTD as it closed down 2.8% on Monday.
  • LEN has dropped from its high and is just above the 20-day EMA at $39.47.
  • There is more important chart support in the $38.80 area.
  • A break of this level will signal a decline to the more important support, line b, in the $35.50 area.
  • The weekly starc- band is at $35.00.
  • The RS line briefly broke its downtrend, line c, last week.
  • The daily relative performance (not shown) also tested its resistance last week.
  • A drop below the relative performance support (line d) would be more negative.
  • The daily on-balance volume (OBV) has turned lower from five month resistance at line e.
  • The weekly OBV (not shown) is still positive.

Toll Brothers, Inc. (TOL) dropped over 3% Monday and is down 12.4% YTD. The support at $32.40 (line g), that goes back to the December 2013 lows, is now being tested.

  • The monthly projected pivot support is at $31.07 with the weekly starc- band at $30.68.
  • The daily relative performance support, line i, was broken in early September.
  • The RS line failed to surpass its declining WMA on the recent rally.
  • The daily OBV has also just broken the long-term support at line k.
  • The weekly OBV is likely to close back below its WMA this week.
  • For October, the preliminary monthly pivot stands at $33.66 with the early September high at $35.94.

What it Means: The technical outlook for the homebuilding index, as well as the individual home construction stocks, is decidedly negative. It would take several weeks of positive action before the daily analysis could turn positive while it would take even longer for the weekly analysis to turn positive. Therefore, I would be avoiding this industry group.

How to Profit: No new recommendation.

Today, on Tuesday, September 23, I will be giving a Webinar on FX trading techniques. If you would like to join me sign up here.

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