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Toll Brothers Slips Further Into the Bears’ Hands

Weak contracts figure spooks TOL stock holders


Luxury homebuilder Toll Brothers (TOL) on Wednesday reported better-than-expected third-quarter results, but also said it signed 6% fewer sales contracts in Q3 vs. the year-ago period. This led to a slump in TOL stock on a big spike in volume that now offers investors and traders a chance at the short side for some continuation selling.

beat the bell stock picking adviceToll Brothers earnings more than doubled year-over-year to 53 cents per share to beat analysts’ expectations by 8 cents. Revenues climbed 54% to $1.06 billion to trump estimates of $989.29 million.

However, as a result of the sales contract figure, TOL narrowed its full-year home delivery guidance from a previous range of 5,100-5,850 down to a new range of 5,300-5,500.

The news wasn’t catastrophic, per se, but the way in which investors sold off TOL stock likely speaks more about the risk-off attitude that seems to have crept back into the housing stocks since the top in March.

TOL Stock Charts

Looking at Toll Brothers’ multiyear charts, the first thing that strikes me is that TOL stock hasn’t done much of anything since early autumn 2012. Of course, there have been plenty of swings in the stock since, but while the broader stock market rose significantly over the same period of time, TOL stock really just tread water. The March top has since been followed by an important lower high in June and July, and with Wednesday’s selloff, the downtrend looks to have resumed.

While it’s too early to tell whether TOL stock eventually will break below the lower support line, this line does look like it will act as a magnet for the stock in the near future.

Toll Brothers TOL stock charts weekly
Click to Enlarge

On the daily chart below, note that after the initial drop from the March highs, TOL stock proceeded to rebound exactly 61.8%, which is an important number for those that follow the Fibonacci methods. In early July, the stock then proceeded to move lower again, broke marginally below the April reaction lows, and in August bounced to another lower high. Thus, Toll Brothers still is working lower from finding key resistance at the lower high from June and July.

Wednesday’s 4.72% selloff on the big spike in volume looks to have resumed the downtrend, and technical analysis 101 now calls for the August lows to be at least retested but likely broken.

Toll Brothers TOL stock
Click to Enlarge

Active investors could use the $35.50 area to lean against the stock on the short side for a move toward the $30-$32 area in coming weeks.

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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.

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