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Tickers in this Article: XHB, LEN, BHS, BZH
There has been some interesting price action in the home builder sector recently that may have important implications moving forward. The group as a whole made an important high back in mid-2009; then after consolidating, continued rallying to new recovery highs. This was important because the group cleared a base that could have been an important bottom and then moved higher from that base. However, the group ran into resistance in May and began to pull back rather sharply. At one point, it appeared that the group was in danger of falling back into its prior base and negating the bottoming theory, but the recent price action in the group is suggesting that support held and the group may be setting up to head higher.

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The pullback from the May highs is clearly shown in the chart below of the SPDR Series Trust SPDR home builders (NYSE:XHB) ETF. The drop from near $20 to under $14 occurred in approximately two months and pulled right back to the original July 2009 breakout area. XHB initially bounced from this level, but found itself back under $14 in late August. This was also occurring within the context of a general market pullback, and XHB was in real danger of reversing course and heading lower. However, critical support held and it now appears that the base that formed from late 2008 into early 2009 was indeed a bottom. The level short-term traders should focus on is the more recent lows near $15, which have acted as a floor on recent pullbacks. (For more, see Technical Analysis: Introduction.)


Source: StockCharts.com


Lennar Corporation (NYSE:LEN ) is a home builder stock that is leading the charge higher. Unlike XHB, LEN has already cleared its October and November highs and recent rallies have been accompanied by increases in volume. LEN has been working on a consolidation after the initial pullback in May, and appears to have broken free of the base. LEN dipped in August, shaking out the last weak hands in the stock, and then surged over its July highs. After some backing and filling that resolved into an ascending triangle, LEN was able to clear resistance near $16.50. This remains the near-term level to watch; if LEN can stay above this area, a retest of its May highs should be in the works.


Source: StockCharts.com


Brookfield Homes (NYSE:BHS ) is another home builder stock following a similar pattern to LEN. The key difference is that BHS has not yet cleared its recent consolidation and confirmed the breakout. The the $10 area is the level to watch because it coincides with the stock's October peak.


Source: StockCharts.com


Beazer Homes USA (NYSE:BZH) is another individual home builder stock with promise. BZH also experienced a harrowing pullback from May through July, during which it lost more than half its value. However, after the initial volatility and subsequent bounce, BZH has settled into a fairly tight range between $4 and $4.75. This is a very clear trading range, and traders should take notice if BZH emerges on either side of it.


Source: StockCharts.com


Bottom Line
While this group continues to be in doubt, there is a lot to like in the price action over the past two years. On longer term charts it can easily be argued that this group has bottomed from a technical perspective and that it survived a retest of its base. On shorter term charts, many of these stocks are pressing against short-term resistance and could be headed toward a retest of their 2010 highs. While the group is not setting the world on fire, the potential exists for a longer term position trade in this group. If the home builders can eventually clear their May highs, it will set a new higher high on the weekly charts and likely pave the way for higher prices. (For more, see Profiting In A Post-Recession Economy) Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

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

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