Shares of homebuilding stocks such as PulteGroup, Inc. (NYSE:PHM) rallied on Tuesday, April 11, and increasingly look ripe for another leg higher. Technically speaking, PHM stock has been consolidating and coiling up below a crucial multiyear horizontal resistance line. A break above this line could result in a fresh leg higher.
Novice and experienced stock market operators alike often forget that stocks are highly correlated, with about 80% of stocks moving up and down together at any given time. I bring up this statistic anytime I come across an interesting-looking stock or index trading setup.
Why? Because I always want to check to see whether the setup is there solely because of the broader stock market’s movements, or because there’s a story of relative strength (or bullish trades) or relative weakness (for bearish trades). The latter typically gives a setup a higher probability of success.
Case in point: Homebuilding stocks such as PHM — and indeed, the entire homebuilding space, as represented by the SPDR S&P Homebuilders (ETF) (NYSEARCA:XHB) — have been showing notable relative strength again so far in 2017.
On the daily chart, we see that the XHB recently broke past important horizontal resistance marked by the black horizontal line.
It doesn’t take much imagination to see homebuilders continue higher still after the most recent consolidation period runs its course.
PHM Stock Charts
For PulteGroup, its nearly 30% rally year-to-date has brought it back to the very upper end of a wide, multiyear sideways channel.
The bears will point to the fact that PHM shares are likely overbought. And until it scores a weekly breakout past the upper end of this channel (around the $24 area), the stock should remain rangebound.
The bulls, however, note that this most recent assault at the upper end of the trading range has come off a meaningful higher low in late 2016, and that PHM stock is now trading much closer to its red 200-week moving average than at previous breakout attempts.
In other words, PulteGroup might finally be ready to break out of this range on a more sustainable basis. However, as a nod to risk management, I will caution that until a breakout occurs, it simply hasn’t yet occurred.
Lastly, on the daily chart, note that PHM stock broke past horizontal resistance around the $22 mark in February. By early March, this led to the current consolidation phase.
This current consolidation phase is taking the shape of a bull flag pattern, which if and when resolved higher above the $24 mark offers next upside targets in $1 increments.
Note that PulteGroup is scheduled to report earnings on April 25. Again, from a risk management perspective, it would make sense to use reduced positions in PHM stock through the earnings announcement. That’s because of the binary outcomes that typically follow such reports.
Like what you see? Sign up for our daily Beat the Bell e-letter and get Serge’s investment advice delivered to your inbox every morning! You can also download his 6 Keys for Successful Trading and Investing.
