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Toll Brothers Beat on Earnings but Stock Lags Key Levels; Here's How to Trade It

Buy Toll Brothers on weakness to its 200-day simple moving average at $37.70. This is the strategy when a stock is above a golden cross on its daily chart.

Luxury-home builder Toll Brothers  (TOL) - Get Toll Brothers Inc. Report beat earnings-per-share and revenue estimates despite stronger demand for smaller homes. 

The stock challenged its multiyear intraday high of $41.70 in premarket trading but opened below its weekly risky level at $41.29 and has traded below its monthly pivot at $39.98. 

My call is to buy the stock on weakness to its 200-day simple moving average at $37.70.

When the Horsham, Pa., home builder reported results after the closing bell on Monday, the shares were steady. Its 2019 high of $41.70, set on Sept. 16, proved the high end of a trading range. Back in July 2005, the stock set its all-time intraday high of $58.67.

Here’s the pulse of the housing market

On Nov. 18 the National Association of Home Builders said its housing-market-index for November slipped a point to 70, still well above the neutral reading of 50. 

The group reported solid demand for single-family homes, primarily because of lower mortgage rates and continued job growth.

On Nov. 19 the U.S. Housing and Urban Development and Commerce Department reported that single-family-housing starts increased 2% in October to 936,000 units. The NAHB continues to see increases in foot traffic where new communities are being built.

A warning for homebuilders is the reinflated bubble in home prices. 

The S&P CoreLogic Case-Shiller Indexes show that new single-family homes are not affordable. The 20-city composite shows that home prices peaked in July 2006, then declined 35% to a bottom set in March 2012 as the home-price bubble popped. 

Since then the bubble has reinflated by 63%, with the current reading 5.6 percentage points above the prior high. Household income has not kept up with this reinflated home-price bubble.

The Daily Chart for Toll Brothers

Stock is Trading Above a 'Golden Cross'

Stock is Trading Above a 'Golden Cross'

Courtesy of Refinitiv XENITH

Since March 5 Toll Brothers has been above a golden cross, when the 50-day simple moving average rose above the 200-day simple moving average, indicating that higher prices would be on the way. 

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When this positive is on the chart, the strategy is to buy weakness to the 200-day simple moving average, which was doable from March 5 until Aug. 29. The stock rallied as high as $41.70 on Sept. 16, which since then has been a ceiling.

The stock is trading between its 200-day SMA, now $37.70, and its weekly risky level at $41.29 around its pivot for December at $39.98. 

The annual risky level is above the chart at $48.16. The stock is well above its quarterly and semiannual value levels at $36.12 and $33.34 respectively.

The Weekly Chart for Toll Brothers

Stock is above its 'Reversion to the Mean'

Stock is above its 'Reversion to the Mean'

Courtesy of Refinitiv XENITH

Toll Brothers will have a negative weekly chart if the stock ends this week below its five-week modified moving average at $40. 

The stock has been above its 200-week simple moving average, or reversion to the mean, at $36.26 since the week of Aug. 30. The 12x3x3 weekly slow stochastic reading is projected to slip to 70.01 this week from 72.43 on Dec. 6.

Trading Strategy: Buy weakness to the 200-day simple moving average at $37.70 and reduce holdings on strength to the weekly risky level at $41.29. Its monthly pivot at $39.98 should remain a magnet.

Value levels and risky levels are based upon the past 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 Sept. 30 established the level for the fourth quarter.

The close on Nov. 29 established the monthly level for December.

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.