Build More Gains With the Coming Breakout in Housing

by Tyler Craig | March 15, 2013 9:07 am

Since bottoming at $8.21 in October 2011, the iShares Dow Jones Home Construction Index Fund (NYSE:ITB[1]) has skyrocketed 191%. And although the rise has been relentless, numerous low-risk entry points have presented themselves along the way.

The ideal opportunity for bullish plays often comes following the formation of a multiweek base, which simultaneously digests recent gains and sets the foundation for the next upswing.

ITBchart1 300x232 Build More Gains With the Coming Breakout in Housing
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Breakouts from the last few bases in ITB have resulted in notable advances. As shown in the accompanying chart, the home construction fund is on the cusp of completing yet another base that has developed during the past two months. If it can takeout resistance in the $24 zone, higher prices should be in the offing.

Among the dozen or so top housing stocks, Ryland Group (NYSE:RYL[2]) scored one of the largest gains Thursday by advancing more than 4%.

RYLchart1 300x249 Build More Gains With the Coming Breakout in Housing
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During the past six weeks, the stock has formed an inverted head-and-shoulders pattern that was completed by Thursday’s break above the neckline. We can calculate an upside target for the stock by adding the distance between the neckline and the head to the breakout point. With the neckline at $39.50 and the bottom of the head at $33.50, the height of the pattern is $6. If we add the $6 to today‚Äôs breakout level ($39.50), we get an upside target of $45.50.

Another bullish omen for RYL is the considerable improvement in its relative strength versus the ITB. As shown in the above chart, the Comparative Relative Strength study has recently reversed back into an uptrend, making RYL one of the best performers in the industry right now.

To allow adequate time for RYL to reach its $45.50 price target, we could enter a four-month bull call spread using July options. Buying the 40-45 bull call spread for $1.90 offers the ability to more than double your money if RYL can rise above $45 by expiration. The max risk is limited to the initial $1.90, while the max reward is limited to the distance between strikes minus the net debit, or $3.10.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

Endnotes:
  1. ITB: http://markets.financialcontent.com/investplace./quote?Symbol=ITb
  2. RYL: http://markets.financialcontent.com/investplace./quote?Symbol=RYL

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