Schaeffer's Trading Floor Blog

A Technical Look at Homebuilders

Short-term and long-term price action confirm potential support

by 5/22/2012 2:31 PM
Stocks quoted in this article:

Today's mild bounce is nothing too shocking, especially given how oversold we are on the short term. After looking over a lot of charts, some sectors I think might be worth dipping your toes into include homebuilders, regional banks, and some select retail and restaurant stocks.

Today, I am going to focus a little bit on the homebuilding stocks after their strong reaction to this morning's April Existing Home Sales number.

The SPDR S&P Homebuilders ETF(XHB - 20.56) was trading near the round-number $20 area after the market's sharp pullback and has bounced pretty nicely the past two days. While yesterday's rally saw participation from almost every sector, today the homebuilders are certainly standing near the top of the heap.

I think the XHB chart is a good example of how you can use multiple time frames to confirm what areas might be important. As you can see on the daily chart, the $20 area caused a period of congestion during the entire month of February and later acted as good support during two separate occasions in April. This area was once again tested this week and is showing strong support so far.

Profit/Loss Chart of Groupon bull call spread
Chart courtesy of eSignal

When you zoom out a little bit on the weekly chart, you can see how the $20 area was the site of a pretty critical peak in May 2010. This former peak coincides with the round number $20 that is obviously important on a shorter time frame. I will use other sentiment indicators to confirm that I'm not in a crowded trade, but I believe seeing this type of price level confirmation over multiple time frames is extremely important.

Profit/Loss Chart of Groupon bull call spread
Chart courtesy of eSignal


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