The Trending123 Pattern Scan is showing some very strong charts in the homebuilder area, and it’s no wonder. With several homebuilder IPOs drumming up excitement, homebuilder confidence improving steadily and the SPDR S&P Homebuilders ETF (XHB) showing 6.79% gains over the past month, the sector is showing seasonal bullishness that you can take advantage of with an outright buy or a call options trade in any one of these three stocks.
Symmetrical Continuation Patterns
Click to Enlarge As you’re probably aware, stocks in the same sector can trade in sympathy with each other–sometimes to the point of showing the same technical patterns. In the homebuilder space, both Masco (MAS) and Ryland Group (RYL) are showing bullish symmetrical continuation patterns. This is a chart pattern that shows two converging trendlines as prices reach lower highs and higher lows. Volume diminishes as the price swings back and forth between an increasingly narrow range reflecting uncertainty in the market direction. Then well before the triangle reaches its apex, the price breaks out above the upper trendline with a noticeable increase in volume, confirming the pattern as a continuation of the prior uptrend.
Some key things to look for in a symmetrical continuation pattern include volume, support and resistance.
A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern.
Look for a region of support or resistance around the target price. A region of price consolidation or a strong Support and Resistance Line at or around the target price is a strong indicator that the price will move to that point.
You can also check that the prices following the pattern have crossed above a key resistance level such as the 200 day moving average. This would provide extra confirmation that the trend is poised to continue upward.
MAS Target Price: $23.90 – $24.60
MAS Stop: $19.88
RYL Target Price: $51.00 – $54.00
RYL Stop: $37.69
Click to EnlargeMDC Holdings (MDC), a homebuilder and finance company, is showing a double bottom over the past 16 days. A pattern like this indicates that the price seems to have reached a bottom after failing to break through a support level and ultimately rising higher in a sign of reversal to a new uptrend.
The double bottom pattern forms during a downtrend as the price reaches two distinct lows at roughly the same price level. Volume reflects a weakening of the downward pressure, tending to diminish as the pattern forms, with some pickup at each low, less on the second low. Finally the price breaks upward above the highest high to confirm the bullish signal.
Analysts differ in their definitions of a double bottom. Some assert that after the first bottom is formed, a rally of at least 10% should follow. That increase is measured from high to low. This should be followed by a second bottom. The second bottom returning back to the previous low (plus or minus 3%) should be on lower volume than the first. Other analysts maintain that the rise registered between the two bottoms should be at least 20% and the lows should be spaced at least a month apart.
Sometimes the two lows comprising a Double Bottom are not at exactly the same price level. This does not necessarily render the pattern invalid. If the second low varies in price from the first low by more than 3% or 4%, the pattern may be less reliable.
MDC Target Price: $37.10 – $37.90
MDC Stop: $31.25
InvestorPlace advisor John Lansing tracks the charts all day and offers expert technical analysis in his day trading, options and trading services: Power Trading at the Open, Parabolic Options and Trending123. Trending123 members receive access to the Trending123 Pattern Scan powered by Recognia free as part of their membership.