Homebuilder stocks like Ryland Group (NYSE:RYL), M/I Homes (NYSE:MHO) and Hovnanian Enterprises (NYSE:HOV) have staged a massive rally since mid 2012. This sector trend, at least for the near-term, may be overextended.
One stock in this group that from a technical perspective looks ripe for a correction to me is KB Home (NYSE:KBH). In September 2012, the stock broke beyond a multi-year downtrend, and from there rallied close to another 70% in a matter of five months. While through the lens of longer term trends the stock could well move much higher in coming months and years, it is in the nearer term timeframes where the stock looks toppish.
The orderly move up looks to remain intact, but the latest rally, past the October 2012 highs near the $17 mark has signs of price exhaustion written all over it.
Now to the good stuff, the stuff that high probability swing traders focus on. Yesterday (Wednesday, Jan. 30) KBH left what in the world of candlestick analysis is called a shooting star candle behind on its daily chart, accompanied by above average volume. I often discuss the high probability of a profitable trade that swing traders can enter into on the back of such a candle. Best of all, unlike many trades to the long side once a buy signal has occurred, no follow-through weakness is needed on the back of a shooting star candle to enter the trade…it’s good to go.
A natural stop level in case the stock decides to rally higher is at the top of yesterday’s candle, near $19.55. Targets for the trade may be near the breakout point past the October highs, a little over the $17 mark.
From a momentum point of view the stock, looking at Stochastics, we note negative divergence since mid-December. In other words, the latest breakout has not been confirmed by more momentum.
Recommendation: All in all, considering the overbought conditions of the broader market, the housing stocks as a group, and now the shooting star candle on the chart of KB Home make this an interesting play to the short-side that may net investors anywhere between 5% – 8% in profits.