The year-to-date tumble in U.S. equities knows no mercy and is pulling lower with just about anything in sight. To wit, shares of homebuilders are getting crushed too, leaving big-time names such as Toll Brothers Inc (NYSE:TOL) in free fall. TOL is down almost 20% for the year-to-date.
However, bears could soon be in for a nasty counter-trend surprise. The selling in Toll Brothers looks to be overdone, and shares are reaching critical technical support.
Active investors and traders could look to play the next bullish reversal for a good reward/risk trade.
When Toll Brothers reported its latest earnings report on Dec. 8, investors reacted with concern, which set the ball in motion for the latest selling spree in TOL stock. To be clear, this is not the only homebuilder stock in free fall; in fact, plenty of its competitors such as Lennar Corporation (NYSE:LEN) are also feeling the pinch, leaving its stock bleeding to the tune of 17% in the first three weeks of January.
The analyst community has been busy up and downgrading TOL stock as of late, but not even Monday’s upgrade to a “strong buy” by investment house Raymond James could help the stock. Toll Brothers slipped another 4.5% on the day.
When downside momentum is this ugly, a stock usually either reflects significant fundamental deterioration or will soon see a major bear squeeze. In this case I am betting on the latter outcome while being respectful to the fact that the global economic slowdown is also weighing on U.S. housing at the very least on the margin.
Toll Brothers Stock Charts
Looking at the multiyear weekly chart, we see that the waterfall selloff in December and January has pushed TOL stock down to a crucial horizontal support area — one that acted as support until 2012. At the same time, Toll Brothers has also reached the bottom of the megaphone pattern, which typically also leads to a bounce before potentially resuming its way lower.
From a momentum perspective, the MACD oscillator has reached oversold readings last seen in the year 2007.
On the daily chart, we see that the stochastic oscillator has been in oversold territory for weeks and that the stock keeps making fresh 52-week lows. While the stock is very oversold from a momentum perspective and sitting at key support areas where a bounce likely will occur, the odds of playing/buying TOL stock for a successful trade only make sense once a bullish reversal has taken place.
Active investors and traders need to keep their eyes peeled for a bearish washout day where bulls regain control by day’s end.
I feel that we are very close to such a day of trading to take place, upon which I am looking to buy the stock for a bounce to one of the Fibonacci retracement levels that I highlighted on the chart. The first upside target would be the 25% retracement, which comes in around the $29.50-$29.70 area.
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