3 Charts That Suggest Homebuilders Are Set to Move Higher

Historically low mortgage rates, a strong job market and a relatively hot economy are some of the key factors that have made investors interested in buying the U.S. homebuilders over the past several months. Recent news from across the sector such as higher-than-expected earnings as well as major mergers and acquisitions are also creating bullish patterns on the charts of many the key players. These bullish fundamentals and technicals will likely continue to act as catalysts to moves higher over the coming months. We take a closer look at a couple examples of how traders will attempt to take advantage of the move.

SPDR S&P Homebuilders ETF (XHB)

The broad homebuilder sector has been trading within one of the most well-defined uptrends found anywhere in the public markets, as evident in the chart of the SPDR S&P Homebuilders ETF. Notice how the combined support of the dotted trendline and the 200-day exponential moving average has been able to prop up the price on each successive pullback since late 2016. Active traders will expect these strong levels of support to continue to hold and will likely use them for determining the placement of their buy and stop-loss orders. As confirmation of a move higher, some active traders will likely look to the bullish crossover between the moving average convergence divergence (MACD) and its signal line as reason to buy near current levels. The ETF is presenting the strongest risk/reward setup since early September. (For more, see: What's Driving the Boom in Homebuilding Stocks.)

Lennar Corporation (LEN)

One of the homebuilders that has been gaining popularity with active traders over the past several weeks is Lennar. The news of its merger with CalAtlantic Group, Inc. is expected to create the largest homebuilder in the United States based on revenue, and the proximity to major support levels suggests that now could be an ideal time to buy. Taking a look at the chart below, you can see that the pattern looks similar to that of XHB and will likely be traded in a similar manner. More specifically, active traders will likely look to buy near current levels to take advantage of the lucrative risk/reward setup. In terms of a price target, active traders will likely set their sights on the 2018 high of $72.13. Stop-loss orders will likely be placed just below $56 in case of a surprise sell-off.

Toll Brothers, Inc. (TOL)

While Lennar tends to focus much of its effort on affordable starter homes, the opposite end of the housing spectrum is also performing quite well. One of the most popular companies among active traders when it comes to trading luxury homebuilders is Toll Brothers. The recent announcement of its first quarter profit, which beat analysts' expectations, will likely prop up the stock price based on fundamentals. However, the nearby support of its 200-day exponential moving average, ascending trendline, and the bullish crossover between the MACD and its signal line will also likely provide comfort to anxious investors because the price will be expected to behave in a similar manner to LEN and XHB mentioned above. Price targets will likely be set near the 2018 high of $52.73. (For more, see: Public Homebuilding Companies Poised for Gains.)

The Bottom Line

Homebuilders are trading within one of the strongest uptrends in the market, and the price action near major support levels is suggesting that the group is readying for a move higher. More specifically, strengthening underlying fundamentals, recent M&A activity, positive earnings results, bullish MACD crossovers and bounces off of long-term moving averages suggest that now is the time to buy. (For more, see: Top 3 Homebuilders ETFs.)

Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.