Moving average crossovers are one of the most common signals used by trend traders for triggering buy and sell decisions. The direction of a primary trend is easily determined by analyzing relatively long periods such as 50 or 200 days. Specifically, when the 50-day moving average closes below the 200-day moving average, it is known as a death cross and is used by many traders to mark the beginning of a long-term downtrend, and it often coincides with a significant shift in underlying fundamentals. One sector that has started to appear on the watch lists of the bears due to bearish moving average crossovers is the homebuilders. In this article, we analyze a few key barometers of the homebuilders sector and try to determine how traders will position themselves over the weeks or months ahead. (For more, see: Basics of Technical Analysis.)
Active traders who rely on sector rotation or those who use moving averages for making buy and sell decisions as a key part of their strategy have found themselves moving out of homebuilders for the past several weeks. Taking a look at the chart of the SPDR S&P Homebuilders ETF, you can see that the consecutive closes below the 200-day moving average have led to a death cross (shown by the red circle), and the recent move below the dotted support could be the catalyst that marks the beginning of a move lower. Active traders will likely hold a bearish outlook on the sector until the price is able to move back above the 200-day moving average, which is currently trading at $41.05. (For further reading, see: Technical Analysis of Stocks and Trends.)
Toll Brothers, Inc. (TOL) is one of the most well-known homebuilders in the United States. Given the recent weakness, the price has moved below the support of the 200-day moving average and has failed to move back above on each attempt over the past several weeks. This bearish price action suggests that the 200-day moving average is now acting as a level of resistance and that it will be used as a guide for bearish traders looking to place their orders. The downward crossover between the 50-day and 200-day moving averages also suggests that the long-term trend is shifting downward and that the bears will remain in control until there is a significant shift in sentiment. (For further reading, see: Top 7 Technical Analysis Tools.)
The chart for Lennar is one of the most interesting from an active trader's perspective. As you can see below, the $55 mark has acted as a psychological level of support and resistance for months, making it an obvious guide for those looking to take a position. The recent close below the trendline, along with the subsequent test that failed to move above, suggests that the bears are in control. The proximity of the resistance combined with the recent decisive move lower suggests that that bias remains to the downside. (For more, see: Moving Averages: Strategies.)
The Bottom Line
The homebuilders have been a strong performing sector over the past couple of years, but it looks like the story is changing based on the bearish crossover between the 50-day and 200-day moving average on key charts. The death cross on major players within the sector suggests that there could be some changing fundamentals at play and that a move lower over the coming weeks or months could be in the cards. (For more, see: Moving Averages Tutorial.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the securities mentioned.