How often have you thought the headlines would assure a certain direction in stocks only to be proved wrong? While it's good to have a thesis on what you think will happen, don't ignore the chart. That philosophy led to successful swing trading in homebuilder stock PHM.
Price Pays
Many relationships exist in economics. A simple one to understand is that lower interest rates spur housing demand and higher rates squelch it. Easy right? So if someone told you that starting at the March 2022 Fed meeting, the target Fed Funds rate would go from 0% — 0.25% up to 5.25% — 5.50% in July 2023, what would be your bet on homebuilders like PulteGroup? Not many would guess that PHM stock would be up 100% in that time.
Certainly one could point to the Jan. 6 follow-through day in 2023 as the start of its strong move. Were there any clues?
Relative strength was a big one for PHM stock then and also for its recent move starting in November.
Leading Stocks On A Follow-through Day
When the market saw its most recent follow-through day on Nov. 1, the action in PHM stock also had strong leadership qualities (1). It broke above a downtrend starting from July, it climbed above its 50-day line and the relative strength was improving. Just a couple days later, the relative strength line was higher than its July peak even though the price wasn't at highs yet (2). This is a telltale sign of a leader.
The flat action that followed was an ideal swing trading setup. It finished the handle on a larger cup-with-handle pattern and consolidated the recent gains from below 70 up to 84. When it moved higher, it was a 7% jump that day and we didn't want to chase it (3). Fortunately, PHM stock flattened out again and gave us another chance.
We added PHM stock to SwingTrader just ahead of the Thanksgiving holiday (4) as it crossed above the high of the gap day (3). But it didn't work immediately. PHM stock took its sweet time and approached the edge of our limitation on how long to keep a stock without progress. But our patience paid off and once it started moving, the gains came quickly.
Selling Into Strength
The yield on the 10-year treasuries dropped throughout November. While housing stocks already had a decent year despite the rising interest rates, the drop put the gains into overdrive. We took our first third of the position off PHM stock when it popped out of our flat area of patience (5).
A few days later we were already at a 5% gain and we locked in another third of the position (6). At the very least, we were going to wait and see how PHM stock handled itself either at the 5- or 10-day moving average lines.
In this week's podcast, Jim Roppel shares examples of stocks doing the opposite of what you would think.
PHM stock seemed to have the personality of quick moves and then pausing a few days to let the short-term moving average catch up, then move up again. That's what happened in mid-December and seemed normal (7).
But the next day saw a 7% jump in the stock price and we exited the remaining position (8). Why? The rapid gain put the stock far above its usual areas of extension above its moving average lines. It seemed it would need a more prolonged consolidation to let those lines catch up.
That seems to have played out as expected. Over the next two weeks, PHM stock remained below our exit price. We didn't get out at the very top, but selling into strength got us within 50 cents and that's good enough.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on X, formerly known as Twitter, at @IBD_JNielsen.
