Toll Brothers Inc: Build a Few Bucks in TOL Stock

If you're looking for one of the rare pockets of relative strength left in the markets, eye the homebuilders

Shares of luxury homebuilder Toll Brothers Inc (NYSE:TOL) rallied Friday along with the rest of the housing sector as interest rates fell and the latest GDP numbers came in below expectations. Homebuilders such as TOL stock are one of the few pockets of consistent relative strength year-to-date in the U.S. markets, and this looks likely to continue for some time.

beat the bell stock investing adviceOn Feb. 24, Toll Brothers reported fiscal first-quarter results that came in above expectations. The company’s top line rose 33% year-over-year while the average home selling price increased 13% to $782,300.

TOL Stock Charts

The bigger picture for homebuilder stocks looks attractive in both absolute and relative terms.

In absolute terms, the SPDR S&P Homebuilders (ETF) (NYSEARCA:XHB) has risen about 6% year-to-date, handsomely outperforming the S&P 500’s 0.6% rise.

On the below chart, we see that in relative terms, the ratio of the XHB versus the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) earlier this year broke above the red diagonal resistance line and has been holding above this line ever since. With last Friday’s rally in housing stocks, this ratio has now also broken above the black horizontal resistance line and looks ready to climb further.

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The aforementioned strength in the housing sector stocks is also seen on the multiyear chart of TOL stock below. Note that in the bigger picture, Toll Brothers’ shares have been consolidating since at least spring 2013, and depending on how we measure it, maybe as long as since September 2012, which is represented by the red box. As a result, TOL has very defined bigger-picture technical resistance around the $40 area and support around the $29.50 area.

A breakout move to the upside has yet to occur from this perspective, but the longer the stock curls up below resistance, the better the odds of an eventual powerful move to the upside.

tol stock charts weekly
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On the daily chart, however, we see that last Friday’s 2.3% rally in TOL stock pushed it to fresh year-to-date highs and as a result also out of a multiweek consolidation phase. Note that the recent consolidation phase also took place above a previous line of resistance around the $37 area. The stock as a result now sits just about 2% below its latest multiyear highs from just about one year ago, and if we see any continued relative strength in the overall housing stocks, then this resistance should be overcome sooner rather than later.

tol stock charts daily
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Active investors and traders could consider buying TOL stock at $39.30 or higher for an initial move toward the $42 area, using a stop at $38.

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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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