Charts Suggest Homebuilder Stocks Are Headed Higher

After steep drop in sales in new single-family homes in early 2020 across the United States, data over the past several months indicate that the trend now seems to have reversed. Active traders are starting to notice that stock prices among homebuilders have started to move higher, and nearby support levels suggest that the risk/reward setup at current levels could make this sector worth watching over the remaining months of 2020.

Key Takeaways

  • Trendlines on charts across the homebuilder sector will likely be used as guides for determining the placement of buy and stop orders.
  • Recent moving average crossovers suggest that the long-term uptrend in homebuilders could just be getting started.
  • Trend traders will likely wait for a pullback toward the major trendlines in order to maximize the risk/reward.

SPDR S&P Homebuilders ETF (XHB)

Active traders interested in gaining exposure to homebuilders often turn to exchange-traded products such as the SPDR S&P Homebuilders ETF (XHB). Fundamentally, this fund comprises 35 holdings spanning sub-industries such as building products, home furnishings, home improvement retail, and household appliances.

As you can see from the chart below, the price has steadily been moving higher since it started to break away from the support of its 200-day moving average in the early summer months. The bullish crossover between the long-term moving averages in July was a clear technical sign that the momentum is in the favor of the bulls. After strong changes in momentum, it is natural for many traders to wait patiently on the sidelines for an opportunity to buy on a pullback. Based on the pattern below, we would expect trend traders to buy as close to the combined support of the dotted trendline and the 50-day moving average as possible.

Chart showing the share price performance of the SPDR S&P Homebuilders ETF (XHB)

D.R. Horton, Inc. (DHI)

One of the top holdings of the XHB ETF that will most likely capture the attention of traders is D.R. Horton, Inc. (DHI). Looking at the chart below, you can see that the price has recently found support near the ascending trendline and its 200-day moving average. Traders will most likely use these levels as guides when determining the placement of their buy and stop orders.

Tuesday's bounce from the support levels suggests that the bulls are in control of the short-term momentum, and it will be of particular interest to traders whether D.R. Horton's stock price is able to surpass the August highs. Buy orders will likely be set as close to the trendline as possible to maximize the risk/reward of the setup. Stop-loss orders will be set just below $69.48 in order to protect against a sudden selloff or change in market sentiment.

Chart showing the share price performance of D.R. Horton, Inc. (DHI)

Lennar Corporation (LEN)

Another top holding of the XHB ETF that will be of interest to active traders is Lennar Corporation (LEN). Looking at the chart below, the dotted trendlines have proven to have dramatic influence over the stock price. Followers of technical analysis will expect the previous behavior near the trendlines to continue and will also likely look to use these levels as guides for determining the placement of buy and stop orders.

Chart showing the share price performance of Lennar Corporation (LEN)

Trendlines are used commonly by traders who seek to ensure that the underlying trend of an asset is working in favor of their position. Trendlines can be used effectively by traders to gauge potential areas of support and resistance, which can help to determine the likelihood that the trend will continue. 

The Bottom Line

Homebuilder stocks have experienced a strong move higher over the past couple months due to higher-than-expected demand for new homes. Based on the charts discussed above, nearby support levels are providing clear guides for traders interested in gaining exposure to the sector.

At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.

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