Key Test for Home Builders

04/28/2015 10:15 am EST

Focus: STOCKS

Thomas Aspray

, Professional Trader & Analyst

Given the home builders faced a steep drop last week, coupled with more numbers still to be released, MoneyShow’s Tom Aspray studies the charts of two key home construction stocks and a broad based ETF to see how they look now.

Last week was a tough one for the homebuilders as D.R. Horton (DHI) reported a 38% increase in 2nd quarter home sales. Still, the stock dropped 6% for the week with 15 million shares trading two days last week, which was three times the daily average.

The selling continued Thursday as both PulteGroup (PHM) and Meritage (MTH) also missed earnings and both dropped over 7%. Last week’s sharp rise in existing home sales encouraged some but the new home sales the next day were very weak.

Today, we get the S&P Case-Shiller Housing Price Index as well as Pending Home Sales on Thursday. Despite last week’s drop, D.R. Horton (DHI) is still up over 4% YTD, while Toll Brothers Inc. (TOL) has done even better as it is up over 7%.

The iShares US Home Construction ETF (ITB) is broadly based as it has 37 home construction stocks. There is over 10% in both D.R. Horton (DHI) and Lennar Corp. (LEN) with 8.4% in PulteGroup (PHM). It has over 61% in the top ten holdings.

So, what is the monthly and weekly technical outlook for ITB and how do two key home construction stocks look now.

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Chart Analysis: The monthly chart of the iShares US Home Construction ETF (ITB) shows that it broke out in February and has made higher highs in the past two months.

  • ITB is in danger of closing below March’s monthly low of $26.51.
  • The rising 20-month EMA is now at $24.51.
  • There is trend line support (line a) and the monthly starc- band are at $21.68.
  • The monthly relative performance failed to make a new high with prices, line b, and is now testing its WMA.
  • The monthly on-balance-volume peaked last November and formed a negative divergence, line c, in March.
  • A drop below the support at line d, will confirm the divergence.

The weekly chart of the iShares US Home Construction ETF (ITB) shows the sharp correction over the past three weeks as the 20-week EMA at $26.07 is now being tested.

  • The monthly pivot support and the 38.2% Fibonacci support from the 2014 lows are in the $25.90 area.
  • The weekly starc- band is at $25.55 with the 50% support at $25.06.
  • The weekly relative performance is now below its WMA.
  • The uptrend in the RS from last year (line f) is on the verge of being broken this week.
  • The weekly OBV has formed a seven week bearish divergence and could break its uptrend, line h, this week.
  • The WMA has also turned lower which is a negative sign.
  • There is weekly resistance now in the $28 area.

Next Page: Two More Homebuilder Stocks to Watch

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Lennar Corp. (LEN) is a $9.5 billion home construction stock that is up just 3.6% YTD as it is 13.6% below its 52-week high of $53.67. The monthly chart may form a bearish engulfing pattern in April.

  • The close last week was below the 20-week EMA and the quarterly pivot at $48.36.
  • The weekly starc- band is at $44.08 with the monthly pivot support at $41.28.
  • The relative performance did make a new high with prices in early April.
  • Over the past three weeks, it has dropped below its WMA and the uptrend, line c.
  • The WMA is also now starting to roll over.
  • The weekly OBV did make a new high with prices and closed last week just barely above its WMA.
  • The daily OBV (not shown) is negative and has dropped below the March lows.
  • The declining 20-day EMA and resistance is now at $49.12.

Toll Brothers (TOL) is a $6.4 billion high end home builder that is up 7.1% YTD. It peaked at $40.33 on April 6 and a low close doji sell signal was triggered the following day.

  • TOL closed last week below its quarterly pivot at $37.12.
  • The monthly pivot support is at $35.01 with the starc- band at $34.92.
  • The chart support from the late 2014 lows, line e, is in the same area.
  • The support in the relative performance, line f, was broken one week after the highs.
  • The weekly OBV did make a new high with prices but dropped below its WMA last week.
  • The OBV has long-term support at line g.
  • The monthly OBV (not shown) also confirmed the new highs.
  • The declining 20-day EMA is at $38.21 with further resistance at $38.97.

What it Means:  The home construction stocks and the iShares US Home Construction ETF (ITB) need a strong rally in the next few weeks to avoid generating stronger sell signals. Most show deteriorating relative performance but more positive OBV.  The daily studies show no signs yet of bottoming out.

The iShares US Home Construction ETF (ITB) was recommended on March 4 and I was looking for a move to the $29-$30 area to take some profits. Will tighten stops now and watch any rally closely.

How to Profit: No new recommendation.

Portfolio Update: For iShares US Home Construction ETF (ITB) should be 50% long at $26.56 and raise your stop now to $25.75. On a move above $27.55 raise the stop to $26.49.

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