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Toll Brothers (TOL - Get Report) is a homebuilder that focuses mostly on luxury homes and the NAHB believes that single-family housing starts should be targeted to buyers of smaller homes. Toll reports earnings after the closing bell on Tues., Aug. 20, with the stock trading sideways above its 200-day simple moving average at $35.70. Given the status of home size issues, shares of Toll should see a jolt of earnings volatility. My call is to buy the stock on weakness to its semiannual value level at $33.34 on the assumption that lower mortgage rates will prompt home buying in all price ranges.

Here's the Pulse of the Housing Market

On Aug. 15, the National Association of Home Builders announced that their Housing Market Index for July inched up a point to 66. The NAHB reported firm demand for single-family homes but are also concerned about rising construction costs caused by excessive regulations, a shortage qualified labor and limited favorable buildable lots. While 30-year fixed rate mortgages declined from 4.1% to 3.6% recently, prospective home buyers are concerned about economic risks caused by the growing trade war with China. It appears that there will be a trend for smaller homes.

On Aug. 16, the U.S. Housing and Urban Development and Commerce Department reported that single-family housing starts increased by 1.3% in July to 876,000 units. The overall housing starts data showed a decline of 4% on a continued slide in multifamily production, which includes apartment buildings and condos. The NAHB is optimistic, since permits for single-family homes bottomed in April and single-family starts bottomed in May.

NAHB / Wells Fargo Housing Market Index Versus Single-Family Starts

Courtesy of the National Association of Home Builders

The blue line is the Housing Market Index and the red line is Single-Family Starts delayed by one month. Note that single-family starts peaked around 1.8 million in mid-2005, which is when the homebuilder stocks peaked. Note that in a robust housing market, starts are higher on the graph than the index. The market for single-family starts is thus a drag on the U.S. economy. Remember that the tax deduction for state and local taxes and property taxes is limited to $10,000 under the new tax law.

Toll Brothers has a gain of 10.2% year to date and is in bull market territory 26.6% above its Oct. 22 low of $28.68. The stock is trading 8.3% below its 2019 high of $39.58 set on May 16. Longer term, Toll is 38.1% below its July 2005 all-time intraday high of $58.67.

Analysts expect Toll to report earnings of 83 cents per share when they report after the closing bell on Tues., Aug. 20. The luxury homebuilder has a favorable P/E ratio of 7.09 and a puny dividend yield of 1.35%, according to Macrotrends. The company has a winning streak of six consecutive quarters in beating earnings-per-share estimates. Wall Street expects Toll Brothers to report a year-over-year decline in earnings and revenue so guidance will determine the stock performance post-results.

The Daily Chart for Toll Brothers

Courtesy of Refinitiv XENITH

Toll Brothers has been above a "golden cross" since March 5, when the 50-day simple moving average rose above the 200-day simple moving average, indicating that higher prices lie ahead. This led the stock to its 2019 intraday high of $39.58 set on May 16. Since this test, the stock has moved sideways with its 200-day SMA crossed many times and is now $35.70. The annual risky level is above the chart at $48.16. The semiannual value level is $33.34, with quarterly and monthly risky levels at $37.19 and $38.83, respectively.

The Weekly Chart for Toll Brothers

Courtesy of Refinitiv XENITH

Toll Brothers has a positive weekly chart with the stock above its five-week modified moving average at $36.15. The stock is also just above its 200-week simple moving average or "reversion to the mean" at $35.70. The 12x3x3 weekly slow stochastic reading is projected to uptick to 31.04 this week up from 30.71 on Aug. 16. Beware, however, that the stock is consolidating a bear market decline of 45% from a high of $52.73 set during the week of Jan. 26, 2018 to its Oct. 22 low of $28.65.

Trading Strategy: Buy weakness to the semiannual pivot at $33.34 and reduce holdings on strength to the quarterly and monthly risky levels at $37.19 and $38.83, respectively.

How to use my value levels and risky levels:

Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play. The weekly level changes each week. The monthly level was changed at the end of each month, the latest on July 31. The quarterly level was changed at the end of June. 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.

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