Monthly Charts of a Homebuilder and a Financial Company

Oct 21, 2008: 11:25 AM CST

It’s worth looking at some of the long term charts on the monthly time frame of some of the key homebuilder stocks and how they peaked around 2005, and then compare that to various Financial Companies that peaked in late 2007 to see the leading characteristic that brought down the Equity Markets lately.  For this example, let’s look at Beazer Homes (BZH) and then Citigroup Financial (C).

First, Beazer Homes (BZH):

Clearly, what goes up does not have to go up forever – but usually the fall isn’t this hard.  The mortgage and homebuilder ‘collapse’ in 2007 showed up previously in the charts, as most leading homebuilder stocks (Pulte Homes – PHM, Meritage Homes – MTH, etc) peaked similarly before news began to be massively public that these companies were in trouble.

Many of these stocks had run-up in value so much that it was difficult to see any potential danger in them.  But let’s look at the charts for clues of early deterioration.

Beazer showed a “Three Push” pattern which can often form tops – the pattern was complete with a ‘flatline’ negative momentum divergence (shown) which confirmed the pattern.  In essence, the pattern signals that bulls are giving it all they have, fall back down to sellers, push prices higher, and finally give up to sellers, having exhausted buying power available.

Following the “Three Push,” price shattered the rising 20 month EMA without even a hint of a bounce and found temporary support just beneath the rising 50 day EMA which is the second target of support after an initial 20 EMA break (Pulte Homes supported exactly at the “50”).

A bear flag formed, the flag of which lasted 3 months before finding resistance about the (now) falling 20 month EMA and shattering the ’50’ again into new lows for 2007.  A quick two-month bounce (now a retracement in a confirmed downtrend) fell short at the major confluence point of the 20 and 50 period EMAs as they crossed, signalling “abandon ye all hopes all bulls who enter here.”  Price then plunged to $10 a share, and now trades currently beneath $4.00.

Beazer peaked in late 2005/early 2006, and financial stocks were up next on the firing line, so to speak.

Let’s look at a major example:  Citigroup

Citigroup (C):

Citigroup found multiple support tests (buying opportunities) each time price creeped back to the rising 20 month EMA before rallying sharply above it, testing it in a semi-“Falling Three Methods” candle pattern before breaking the “20,” finding only temporary support at the “50,” forming two doji candles (of indecision) and then falling quite precipitously down through these averages as 2007 came to a close.

The selling was relentless, as was the volume.  We never know how far a move will take price, and we always have a tendency to wait for a reaction, whether to get short initially, or exit (“Oh, I’ll exit at the next bounce-up”).  It’s these run-away, mammoth sustained volatility moves that can do severe damage to trading and especially investment accounts.

The lesson is to pay attention to the larger structure and how price is behaving or situating itself on the larger timeframe for insights into what type of position/bias to have on the smaller timeframes – no matter what your style of trading.

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Copyright and Published by Corey Rosenbloom of Afraid to Trade.
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