Homebuilders Presenting Trading Opportunity

01/21/2010 12:01 am EST


I wrote on the homebuilder stocks earlier this year as a group that was looking strong despite the very negative sentiment still surrounding the group. Fundamental data is still weak at best, and banks are still very leery of taking on more loans. Despite all the negativity though, the group remains in a favorable position. Today, I am following up on those comments and taking a look at some other charts of homebuilder stocks.

If you look at the three charts below, you will notice they are all trading in a very similar pattern. Overall, the group is in an interesting area as they have broken free of a declining trading range, or channel, but still remain under their recent highs. All three are flagging after a recent run up that took them close to important resistance levels, but ended with them backing off of these levels.

One of the reasons this group looks attractive here is because the flag is offering a cluster of candles, resulting in a narrow range from which a trader can take an aggressive setup. If these stocks clear the small flag, a retest of the prior highs may be in the cards, resulting in a great risk-versus-reward setup. Beyond this, they could eventually head even higher with some market cooperation. Well-defined risk with good possible upside is exactly the type of setup I look for.

The Ryland Group, Inc. (RYL)

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Brookfield Homes Corporation (BHS)

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Meritage Homes Corporation (MTH)

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By Joey Fundora, trader and blogger, DowntownTrader Blog

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