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Short-Side Trade in St. Joe Company (JOE)

Homebuilders are about due for a pullback


Now that my trade idea on Yelp, Inc. (NYSE:YELP), has reached its profit target at $21.60 (a 7% gain), it’s time to look for the next high probability trade setup.

The housing/real estate space as a whole had a good run higher in 2012.  For a basic overview/proxy we can look at the fairly well-diversified SPDR S&P Homebuilders ETF (NYSE:XHB), which rose about 60% last year and about twice that off the 2011 bottom.

Real estate development firm St. Joe Company (NYSE:JOE) rose sharply along with the broader sector, breaking a multi-year down-trend.  Note the breakout past the red trend-line on the weekly chart.

After a 67% run off the June lows, JOE started off 2013 with two signaling (bearish) candlesticks; a failure to close at the day’s high on Jan. 2, followed by a bearish engulfing day (sell-off) on Jan. 3.

These bearish candlesticks formed just as the stock had reached the important 61.80% Fibonacci retracement of the swing from the February 2011 highs down to the November 2011 lows.

While from a longer-term perspective the stock may well move higher still, the combination of the two bearish candlesticks and the Fibonacci retracement resistance line increases the odds of a near-term pullback.  The biggest risk to the trade is that the rip-roaring start to January continues as funds have to chase the market higher without so much of a pause – much like what we saw in early 2012, and thus pulling JOE with it.  For this reason a stop at the highs from Jan. 3 near $23.60 makes sense.

Overall however, the homebuilder stocks as a group had a big year in 2012 and near-term may be due for a breather.  The S&P Homebuilders ETF too has flashed a couple of concerning signals from its daily candlesticks thus far in 2013 and any consolidation in the group as a whole should help St. Joe Company move lower.

Recommendation: Short JOE for the next 5% lower with a price target near $21.80 and a stop near $23.60.

Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter.

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