From the desk of Tom Bruni @BruniCharting
Today’s mystery chart reveal post highlighted the potential opportunity in the Homebuilder ETF ($XHB) as it sits at an important inflection point within a longer-term uptrend. In the post I highlighted that although there is mixed performance among the components, the reward/risk is still skewed in favor of the bulls at current levels. As a follow-on to that, this post will be highlighting some of the best and worst stocks in the sector along with our risk management levels and targets for each.
First up is Home Depot which has been in a solid uptrend since breaking out from a year-long consolidation in early 2017. It’s spent the last four months correcting toward its 200-day moving average and uptrend line from the November 2016 lows and is now continuing higher. As long as prices are above 187 the stock looks poised for further gains with a price target at 219.10.
Trex Company Inc. has been an absolute beast of a stock and just broke out again to new all-time highs after 6 months of consolidation. As long as prices are above 118 we want to be long and taking profits near 144.75.
Willams-Sonoma Inc. has been trying to carve out a bottom since early 2016 and is now breaking out of its range to the upside. As long as prices are above 55.80 we want to be buying weakness and looking to take profits near 71.50 as this looks to be the start of a new uptrend.
USG Corp. broke out of a 4-year base in April after a failed breakout to start the year. Despite prices looking heavy in the short-term and a bearish divergence in momentum, we want to be buying weakness as long as prices are above 35.75 and taking profits at 48.80.
Armstrong World Industries Inc. has tried to break above resistance near 57-61 for the last 10 years and is making another attempt at it. Given this is an incomplete weekly candle we need to wait for Friday’s close for breakout confirmation, but as long as prices close above 61.25 we want to be long and look to take profits at 87.30.
The last long on our list is a bit of a wildcard because it’s a lower-probability trade that’s offset by a ridiculously skewed reward/risk ratio. Bed Bath & Beyond is attempting to confirm a failed breakdown below its 2017 lows after falling 80% over the last 4 years. A weekly close above 19.25 would confirm the potential failed breakdown and bullish momentum divergence, at which point we’d want to be long and look for prices to mean-revert back toward former support/resistance near 41 over the intermediate-term.
Now we’ll get into some of the weaker names in the group worth avoiding, like Whirpool Corp which has done nothing for 4 years and is headed back toward the lower end of its range.
Similarly, Johnson Controls International PLC made fresh four-year lows in April and is retesting them now with momentum in a bearish range and prices below a downward sloping 200-day moving average.
Legget & Platt Inc. is another name that’s been putting in a “rounding top” of sorts for the last 3.5 years and is sitting below a downward sloping 200-day moving average with momentum in a bearish range.
Since I run the risk of sounding redundant I’ll close with Tempur Sealy International Inc., which looks like a classic “hot mess” we like to avoid. There’s very little direction in the stock, so we’d prefer to focus on stocks where we have an edge and avoid names like this.
The Bottom Line: Although performance among its components is mixed, the bias remains to the upside in the Homebuilder ETF ($XHB). To take advantage of this theme we want to focus on the names listed above where the risk is well-defined and the the reward/risk is skewed in our favor.
There are other names that look good as well, but I tried my best to keep this list to those that I felt were actionable now rather than focus on names that have yet to break out or have run and are hard to risk manage. If other names in the space do start to work we’ll post an update with those, but for now these are the stocks and levels we’re focused on.
Thanks for reading and let us know if you have any questions!