The Housing Stock Conundrum: Analyzing TOL

Housing stocks have made a windfall for those bright minded speculators who have traded the obvious short entry signals over the past year (I am not in that prestigious group). While the trend is still negative, there are signs that we may see a bottom forming. Today I analyze Toll Brothers, one of the “go to” housing plays that has been on my short watchlist for what seems like ages.

First, let’s dissect the weekly chart:

The first thing I always take note of is the major support and resistance levels. Here, we see support where the bottom seems to be forming, in the $22 range. Overhead resistance is in the $27-28 range. If I were to play the bounce, I would buy right now at support, and sell once the stock nears resistance. Also take note of the RSI and stochastic ranges. I would not buy at the top of the range.

Now let’s move to the daily chart:

The first thing I notice on the daily chart is the “double bottom” that looks to be forming. Accompanying the double bottom is a positive volume pattern showing strong buying. This type of volume behavior is a must for buying a bottom.

While the double bottom pattern is a positive, TOL is a tough buy with the 50 day moving average looming under 2 points away. I would probably wait for a breakout over the moving average, with a target of $27-28.

It is clear that, in the near term, I am looking to play the long side of this stock. If I play the short side, it will only be on strength, using either the 50 day or price-by volume ranges as resistance. I will not short the current level.

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