Interest Rate Roundup

Friday, March 30, 2007

A home building chart: Shampoo, anyone?

It's Friday and I haven't thrown a chart up on my blog for a while. So here's one to consider as we head into the weekend. It's a weekly chart of D.R. Horton, the second-largest public home builder (and the one whose CEO said 2007 would "suck").

If you know anything at all about technical analysis, then you may be familiar with the dreaded "Head and Shoulders" pattern. That's when you get a rise to an initial peak, a pullback, then a rise to an even higher high. That's followed by a sharp decline to the base of the initial peak (or "neckline"), a subsequent rally to a lower high, and then, a collapse through the neckline.

It's not really as complicated as it sounds. The bottom line is that it's a long-term topping pattern, one that signals the end of a powerful trend in almost any stock, index, commodity, etc. As you can see, this chart looks a heck of a lot like such a pattern to me (I've labelled the left shoulder, head, and right shoulder in the chart). And it's not just D.R. Horton -- many other home building charts look the same.

The pattern won't be complete until and unless the neckline gives way. But I just thought I'd share what I see going on, technically speaking. I've made no secret of my fundamental view on the sector already, though ultimately, only time will tell if my views are right.


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