The past two days after the FOMC meeting have not been kind to most stocks, which includes homebuilders such as KB Home (KBH). The stock, which topped in mid-May, is now roughly 20% off the year to date highs and has arrived at an important support line both in the near and longer-term time frames.
After a rough going during the financial crisis, homebuilders started a major rally during the summer of 2012, which in the case of KBH broke past an important multi-year resistance line in March of this year. The breakout ultimately may have simply allowed the stock to build a better medium-term top. The resistance line, which after the current sell-off has now become a first line of support, sits right around the $19.70 – $20 area. Through this longer-term lens, note that the past two days of selling have now broken the stock’s up-trend in a meaningful fashion for the first time since June 2012.
The stock’s breakout past the $19.70 – $20 area in March, the overshooting into May, and the subsequent sell-off over the past month has now shaped a so-called head and shoulders formation. This type of formation has bearish implications should the stock break back below the neckline, in this case around aforementioned support area. An ultimate price target (measured as the difference between the top of the head and the neckline, then subtracted from the neckline), in case of a breakdown, for KB Home would come in around the $15 mark. While the stock may be somewhat oversold in the immediate term, a break below the neckline would likely attract the stock toward lateral support and the 120-day simple moving average around $17.20 – $18.00.