Missed the Rally in This Sector? Here's Another Chance.

08/17/2012 10:00 am EST

Focus: STOCKS

Greg Harmon of Dragonfly Capital highlights two stocks in a rallying sector that are preparing for another move.

The homebuilder stocks have been working higher for about a year. Many are of the view that they have run their course and are ready to pull back.

Where Beazer Homes (BZH) and DR Horton (DHI) appear to fit that bill, the weekly charts of two others Lennar (LEN), and Toll Brothers (TOL), are exhibiting classic bull flags. Let's take a look at LEN:

chart
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The chart for Lennar (LEN), above, shows the tight consolidation between 29.50 and 32, in the blue box. What makes it interesting is that the volume is decreasing as it consolidates and the Relative Strength Index (RSI) is running flat in bullish territory with a Moving Average Convergence Divergence indicator (MACD) that is also flat.

These add up to the bull flag, where buying and selling pressure are exhausting each other. A Measured Move higher takes it to 38 on a break above 32.

The chart for Toll Brothers (TOL) below has the same signs: consolidation of price in a tight range between 28.50 and 31.20 with declining volume but a RSI and MACD that are running flat. The Measured Move higher in this name takes it to 37.40.

chart
Click to Enlarge

If you have missed the rally in the homebuilders, your opportunity may be coming up very quickly. Keep these two names on your watch list for an entry on the breaks of the flags.

Greg Harmon can be found at Dragonfly Capital.

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