Homebuilder D.R. Horton (DHI) - Get Report set an all-time intraday high of $55.67 at the open Tuesday after beating earnings expectations. The stock has an elevated P/E multiple for a homebuilder and the stock tested its monthly risky level at $55.43 as an opportunity to book profits.

The benchmark homebuilder has a cross-nation footprint in building high-quality single-family homes. As a full-service builder the company also provides mortgage financing. The stock has become a trading vehicle, not a long-term investment, as its P/E multiple is 12.27, according to Macrotrends. Homebuilders are a buy only when their P/E ratio is 8.00 or lower.

Here's a link to the earnings details as provided by TheStreet.

D.R. Horton had a miserable 2018 ending the year deep in bear market territory with an annual decline of 35%. Since bottoming at $32.19 on Dec. 24, the stock is in bull market territory up 62.6% at its close of $52.65 on Nov. 11. This stock is the only major homebuilder setting an all-time high as others remain well below their July 2005 highs.

Lower mortgage rates and a slower rise in home prices led to stability in the housing market.

The S&P CoreLogic Case-Shiller Indices

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The latest reading the 20-City Composite shows that home prices rose by 2% year over year in August with Phoenix, Charlotte and Tampa leading the way. This index peaked in July 2006 then declined by 35.1% to bottom set in March 2012 as the home-price bubble popped. Since than the bubble has re-inflated by 62.7% with the current reading 5.6% above the prior high. This could become a problem if the economy slows down in 2020.

The daily chart for D.R. Horton

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Courtesy of Refinitiv XENITH

The daily chart for D.R. Horton shows that the stock has been above a "golden cross" since April 4 when the 50-day simple moving average rose above the 200-day simple moving average to indicate that higher prices lie ahead. The close of $34.66 on Dec. 31 was an important input to my proprietary analytics and its annual pivot remains at $45.79. This level was first tested on April 16 and was a magnet between then and Aug. 7 when it became a value level at which to buy. The close of $41.13 on June 28 was another input to my proprietary analytics and its semiannual pivot at $47.84 was a magnet between Aug. 1 and Aug. 19 as the stock stair-stepped higher. The close of $52.71 on Sep. 30 was an input to my analytics and its fourth quarter value level is $49.55. The Oct. 31 close of $52.37 was an input that resulted in the November risky level at $55.43 which was tested at the opening high on Tuesday, Nov. 12.

The weekly chart for D.R. Horton

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Courtesy of Refinitiv XENITH

The weekly chart for D.R. Horton is positive but overbought with the stock above its five-week modified moving average of $52.16 and well above its 200-week simple moving average or "reversion to the mean" at $38.44. The 12x3x3 weekly slow stochastic reading is projected slip to 80.33 this week down from 86.06 on Nov. 8. During the week of Nov. 1 this reading was 91.05 above the 90.00 threshold making the stock an "inflating parabolic bubble" and bubbles always pop.

Trading Strategy: Buy weakness to its quarterly value level at $49.44 and reduce holdings on strength to the monthly risky level at $55.43.

How to use my value levels and risky levels:

Value levels and risky levels are based upon the last nine monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31, 2018. The original annual level remains in play.

The close at the end of June 2019 established new monthly, quarterly and semiannual levels. The semiannual level for the second half of 2019 remains in play.

The quarterly level changes after the end of each quarter so the close on Sep. 30 established the level for the fourth quarter.

The close on Oct. 31 established the monthly level for November.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.

To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble" as a bubble always pops. I also call a reading below 10.00 as being "too cheap to ignore."

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.