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D.R. Horton Builds a Suddenly Bearish Case (DHI)

Home construction company D.R. Horton (DHI) took a 1-2 punch Thursday before the start of trading, as unimpressive fiscal third-quarter earnings also coincided with a weak June new-home sales number. All this led DHI stock to stumble on a huge surge in volume, and through a multiweek/multimonth lens, shares now favor lower prices.

beat the bellSpecifically, D.R. Horton suffered some significant charges that brought adjusted earnings to 32 cents per share, missing estimates for 49 cents by a wide margin and coming in 25% lower year-over-year. Revenue, on the other hand, came in better than expected at $2.15 billion vs. the $2.08 billion estimates as sales grew 32% YOY. The homebuilder has increased incentives for customers, thus cutting into margins despite the sales growth.

To add to the concerning report from D.R. Horton, the Commerce Department on Thursday released a weak June new-home sales report. New-home sales came in at 406,000 vs. the analyst estimates for 475,000, and also well lower than the 504,000 annual rate of sales in May.

While analysts and media continue to spin the state of the housing market in one direction or another, Thursday’s move in the homebuilder stocks was anything but bullish and a pretty clear indication that sellers in those stocks are quick to hit the button when headlines don’t smell too rosy.

DHI Stock Charts

To be fair, not all homebuilder stock charts look equally bearish, but in the case of DHI stock, the sellers made a clear statement Thursday. The 11.5% selloff swiftly brought D.R. Horton back to its 2011 uptrend and the 200-day simple moving average (red line). Some support is possible here, but the more concerning sign for me came from volume, which on Thursday totaled more than 26 million shares, or about 3.5 times the stock’s average daily volume. A 10%-plus selloff in a stock on a massive surge in volume often results in further downside in coming weeks/months.

I also would note that DHI stock formed a double top and lower high with its highs in February and June, which further increases the probability that D.R. Horton ultimately snaps its 200-day moving average and the 2011 trend support line.

D.R. Horton DRI stock chart multiyear
Click to Enlarge

On the daily chart, note that while DHI stock did find support at its 200-day MA at Thursday’s close, it also snapped its October 2013 trend support line. Here, the surge in volume is a sign of more weakness to come, and thus offers weak risk/reward for the bulls.

D.R. Horton DRI stock chart daily
Click to Enlarge

Active investors and traders could consider waiting for a little oversold bounce before shorting the stock, and/or wait for volatility to come down a little before buying put spreads. Through a multiweek/multimonth lens, DHI looks to have room down to the mid to high teens.

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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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