The housing sector, which seems to have been saddled with the responsibility for the entire economic recovery, may be about to let it down. 

#-ad_banner-#Last week, when homebuilding supplier Lumber Liquidators (NYSE: LL) collapsed after projecting second-quarter earnings would be well below analyst estimates, shares of homebuilders stumbled too. It did not look like much, but it signaled a change in fortunes for the group as a whole.

One of the larger and better-performing stocks in the group, D.R. Horton (NYSE: DHI), now looks like a sell. 

Shares hit a price ceiling, and unlike many of its peers, DHI has room to fall before we have to worry about a long-term breakdown. 

DHI sold off between February and March, along with the rest of the sector, but managed to stabilize shortly thereafter. In May, it began its march back to previous highs and got there on July 1. That day, it closed at a new high for the year in what seemed to be a technical breakout.

Unfortunately, that was not the case. The next day it scored an outside-day reversal to the downside by notching a new intraday high but closing down. It also gave back most of the previous day’s gain.

In simple terms, the breakout failed, and in technical analysis failed bullish signals often become bearish signals.

DHI gave it one more try on July 16, as it bounced off a short-term trendline with a strong price action and heavy volume. The move was the result of a report that showed builder confidence was at its highest level since January.

But Thursday, the party ended when housing starts data were released showing June marked the slowest pace in nine months. Not only did DHI’s short-term breakout fail, but the trendline from May broke to the downside. 

Trend-following types may question my choice of selling a leading stock over a lagging stock in the sector. Other stocks may be below trendlines and major moving averages, meaning they are already weak. But they are also a lot closer to respective support levels, which could limit downside movement. DHI, on the other hand, has room to fall before reaching significant support.

So, why DHI? To paraphrase infamous bank robber Willie Sutton, “because that’s where the money is” — for shorting.

Action to Take –>
— Sell DHI short at the market price
— Set stop-loss at $25.25
— Set initial price target at $21 for a potential 11% gain in eight weeks

This article was originally published at ProfitableTrading.com: 
Homebuilders Breaking Down — Sell This One Now!

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