The slide in interest rates has helped homebuilder stocks rally nicely during the past few weeks. Among the technically improved in the group is single-family home construction company D.R. Horton (DHI), which currently offers the bulls clearly defined support and resistance levels on which to focus.
Home sales and new construction stats are some of the most closely watched numbers by investors. On Thursday, April pending home sales came out, and an increase of 0.4% missed analyst estimates. (Demand for previously owned homes in April was less than expected.) Depending on countless little factors on any given day, homebuilder stocks can react in either direction on a miss like this. On Thursday, Wall Street shrugged off the news and kept homebuilders like DHI stock afloat.
While the one-day reaction wasn’t so significant in and of itself, it was constructive to see homebuilder stocks hold up in the context of the recent rally.
Shares of D.R. Horton held up among the best in the group on Thursday, and this was at least in part was due to an upgrade. RBC Capital upgraded DHI stock from “sector perform” to “outperform” and raised their price target from $26 to $27.
Homebuilder stocks can be very sensitive to moves in interest rates, as lower interest rates can mean lower mortgage rates, which in turn can spurn demand. Other times, however, lower interest rates can be interpreted as a lack of demand, and that can affect home builder stock prices negatively. Either way, it all depends on a myriad of factors on any given day/week/month.
To make stock picking in homebuilders a little more straightforward, I like to look to the charts.
DHI Stock Charts
From a multiyear perspective, DHI stock formed a crucial higher low in the August 2013-November 2013 period, which also served as a digestion period of the steep rally from late 2011 into spring 2013. After bouncing from the higher low, DHI overcame its 200-day simple moving average (red line) in late 2013, and the stock has been basing above there ever since.
Another higher low was formed this spring, all of which is now visibly pressing DHI stock against the diagonal resistance line (black) dating back to May 2013.
On the daily chart, note that the rally off last autumn’s higher lows retraced by 50% in March, which is where the next higher low began to form. The rally over the past week-and-a-half or so has now put the next up-move in motion.
A first upside target here would be the February highs near $25, and a break past there could get DHI stock moving into the $26-$27 area.
If D.R. Horton is to remain well positioned in the near-term, it shouldn’t drop below the $22.50 area.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
