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Tickers in this Article: XHB, LEN, BZH, GFA
The home builders have been trying to bottom out for the better part of a year despite the majority of market participants being overwhelmingly negative on the group. Not many investors believe that housing has bottomed with the glut of unsold homes and foreclosures still flooding the market. However, on a technical basis, the home builders' group has several elements that qualify as bottoming action; as a result, the group looks poised for a possible move higher.

In looking at the SPDR S&P Homebuilders ETF (NYSE:XHB), which attempts to replicate the S&P Homebuilders Select Industry Index, the group was able to set a higher high with the summer rally, which eclipsed the highs set in March. Zooming in on more recent action, XHB has been consolidating the summer rally for several months, forming an ascending triangle. XHB was able to break out of the triangle recently, but is still beneath its recent highs. A key level to watch is XHB's current test of the $15 level. If it can hold this area and turn higher, it should lead to a retest of the recent highs and a possible breakout. (For more, see The Anatomy Of Trading Breakouts.)

Source: StockCharts.com

Lennar Corporation, (NYSE:LEN) is an individual home builder that also bottomed out late in 2008 and set a higher high last summer. LEN has been consolidating the summer rally as well, although it hasn't cleared its base like XHB has. Currently, LEN is trading in a range and testing the upper part of the range. A move above the descending trendline marking the recent highs would be a possible signal that LEN's consolidation is coming to a close. The important levels to watch are the recent high near $12.53 and the low near the 200-day moving average at $11.56.

Source: StockCharts.com

Beazer Homes USA, Inc. (NYSE:BZH) is another individual home builder that is trading in an ascending triangle. BZH is also still within the base, but is close to the upper bounds of the trading range. The volume in BZH has also been bullish, with the majority of the volume coming in on positive days. A move above $5.19 would be a bullish development and could signal an eventual move to new recovery highs.

Source: StockCharts.com

Gafisa S.A. ADR (NYSE:GFA) has been one of the best-performing home builder stocks, although it is an ADR for a Brazilian company. GFA has recovered the majority of its bear market decline, and has been consolidating in the near term for several months. It is also trading in a triangle pattern, although it is still well off the upper part of the range. The $30 level is important to watch on the downside, but GFA also has a well established support level near $27. While GFA probably needs much more consolidation, it is worth watching as it has been leading this group. (For more, see The Basics Of Support & Resistance.)

Source: StockCharts.com

Bottom Line
It may seem counterintuitive to think of housing stocks bottoming when the housing market is still in shambles, but investors should always be looking ahead in the stock market. The stock market and economy are typically not in sync, and usually the stock market is well ahead of the economy. While the home builders still have a lot of work to do in terms of proving themselves, the recent price action shows promise. This is one group that should be watched in 2010.

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At the time of writing Joey Fundora did not own shares in any of the companies mentioned in this article.

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