Fitz Bits: Homebuilders Are Building a Foundation

Today we'll look at the homebuilders -- a sector that has received tremendous attention lately:

• Toll Brothers (TOL - commentary - Cramer's Take)
• Meritage Homes (MTH - commentary - Cramer's Take)
• KB Home (KBH - commentary - Cramer's Take)
• Hovnanian (HOV - commentary - Cramer's Take)
• MDC Holdings (MDC - commentary - Cramer's Take)
• Lennar (LEN - commentary - Cramer's Take)

Each day, I'm featuring several reader requests for the current technical take on a stock. I can't assure you that I'll get to yours, but I will certainly make every attempt to do so, as long as the stock meets the following criteria.

1. The average daily trading volume needs to exceed 250,000 shares. If a stock trades too thinly, chart analysis doesn't help much, because there just are not that many traders involved. One big buy or sell order can move the stock in ways that chart analysis just cannot predict. So let's stay above 250,000 daily shares.

2. The stock really needs to be trading above $5. Sub-$5 stocks don't get the same treatment by institutions and portfolio managers. Also, many traders set their trading screens to ignore stocks below $5 just to cut down on their trading candidates. While I'm sure your favorite penny stock is the next undiscovered gem, I'm not in the business of breaking news stories ... so once your gem is discovered, let me know, and I'll take a look at the chart.

3. Make sure you check my recent "3 Stocks" videos. I don't want to be too redundant, so if I've recently covered a stock in video format, I won't repeat it here.

3 Stocks I Saw On TV

Hopefully, you've noticed that I alternate between daily and weekly bars in the charts. It's important to understand the underlying rationale for choosing one time frame over another. I differentiate between these time frames in pretty simple terms.

The longer time frame -- the weekly bar chart -- is my "decision" time frame. I want to remain in phase with the trend, and I use the weekly bar chart to identify the trend. So I'll feature a weekly chart when I want to emphasize a certain aspect of the prevailing trend -- not a specific buy or sell point. This weekly chart is the timeframe in which I make my decision: Do I want to buy or sell the stock?

The daily chart is my "action" time frame. Once a decision is made on the basis of the weekly time frame, then we zoom in on the daily chart to choose that level at which action is taken. The daily time frame is my preferred frame of reference for actually implementing the decisions I've made on the weekly chart.

In your own analysis, make sure you are using different timeframes for different things, otherwise your actions will largely be a function of your emotions.

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This weekly chart of Toll Brothers shows how the bulls have consistently struggled with $23 for quite a while. But we're finally seeing some headway as the stock rallied to its highest level since last summer. While I think the stock is too overextended to buy now, if you want to own TOL, I'd suggest waiting for a pullback to around $20 before buying.

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Meritage Homes is forming a really sloppy head-and-shoulders pattern. I've indicated where the "shoulders" are ... but let's face it, the real story here is a capitulation selloff in late December and early January.

The stock has now poked up above resistance and looks poised to start an uptrend. As a staunch bear on this industry group, I'm having a tough time accepting that we've seen the bottom. But this chart knows a heck of a lot more than I do -- and the chart is looking bullish. I'd be a buyer on pullbacks.

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Notice how KB Home is now consistently above the middle Bollinger Band (the 20-week moving average). But with the stock tagging the upper Bollinger Band and nearing prior resistance, I just wouldn't be buying now. Instead, I'd wait for a pullback to the low $20s before dipping a toe in the water.

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This weekly chart of Hovnanian looks a heck of a lot like the KBH chart, except that this week is hitting a new high for the year. Still, I'd be a buyer of HOV, but only on a pullback.

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Of all these stocks, MDC Holdings probably has the best balance sheet because it's not choking on a bunch of overpriced land that nobody wants. So as the market improves over the next six months, MDC may be an outperformer. But let's not jump the gun. The stock has run more than 20% in two days. Give it a chance to rest before buying.

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Lennar is just peeking above the middle Bollinger Band and is struggling with a key resistance level at $20. If the stock can grind above $20, it's probably got a chance of moving higher. But the stock is up more than 30% in two days. Don't you think it's best to just step aside and let the stock either run without you or pull back so you can buy it cheaper?

Be careful out there.

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At the time of publication, Fitzpatrick had no positions in the stocks mentioned, though positions may change at any time.

Dan Fitzpatrick is the publisher of StockMarketMentor.com, an advisory newsletter and educational forum dedicated to teaching effective risk management and trading methodologies to aspiring traders and investors. He is a former hedge fund manager and a member of the Market Technicians Association, and he now trades from his home in San Diego, Calif. While Fitzpatrick holds various securities licenses, he does not give recommendations to buy or sell stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. He appreciates your feedback; click here to send him an email.