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Short Trader: Dismantling Pulte

The blueprint for this homebuilder shows more downside.

The decline of the homebuilding stocks has been widely publicized, although many people thought the stocks had bottomed last July. Some stocks are still above the July low; others have dropped below those levels. However, there just isn't any reason for these stocks to stop going down.

The market is finally starting to buy into the idea that the

Federal Open Market Committee

just might not be dropping interest rates (which are still at historic lows) anytime soon. And some of the biggest beneficiaries of lowered rates are the homebuilders.

Also, despite the declining prices, these stocks seem to be getting more expensive. Because earnings are dropping faster than the price, the price-to-earnings ratios are expanding a bit.

My thesis is straightforward on this group: Even though the easiest money has been made on the short side of the trade, there is just no reason for these stocks to start catching bids.

Still, the homebuilders are not universally hated either; they still may look attractive to some value-oriented money managers. Just yesterday, the National Association of Realtors finally came clean and lowered projections for both sales and sales prices.

One of the biggest companies in this group is

Pulte Homes

(PHM) - Get PulteGroup, Inc. Report

, which is scheduled to release first-quarter earnings after the market close April 25. Its conference call will be the next day at 8:30 a.m. EDT.

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The stock is just breaking below key support and appears to be headed lower. Let's take a look.

For the past month or so, Pulte has been finding support at about $25.50 to $26, with the shares closing at $25.57 Wednesday. But there have just been no bids to push the stock higher, and the downside volume is starting to increase.

Pulte Homes (PHM) -- Daily

A possible short entry is on a move below $25.50. Once the short trade is opened, you might want to put a buy-stop up at around $27.50. That keeps the risk at an acceptable level.

I envision this as a long-term short, with a potential downside target of $15 a share. But that's way out in the future -- let's just get the trade going first.

Update on Previous Picks

  • DRS Technologies (DRS) : The cost basis on this short pick is $51.25, with a stop at $52.60. I suggest moving the stop down to $52.20, just slightly above the 20-day moving average. Shares of DRS closed at $50.32 Wednesday.
  • DuPont (DD) - Get DuPont de Nemours, Inc. Report: This stock has still not reached the adjusted short entry of $50.10. DuPont has just never been strong enough to trigger a short entry at the upper end of the trading range. While this one might just get away, I'm not inclined to chase it. Instead, let's keep it on the watch list and hope for a rally to fill the short. Shares of DuPont closed at $48.66 Wednesday.
  • Heelys (HLYS) : This short is a scratch. The cost basis was $30.56, and the stock had been moving lower. After dropping the stop to $29.95, the stock gapped just above it to $30.01 and triggered the stop. I don't really count a 55-cent profit as much of anything except covering commissions.

At the time of publication, Fitzpatrick held no positions in the stocks mentioned, although holdings can change at any time.

Dan Fitzpatrick is the publisher of

, 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;

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