Charting Housing's Dead-Cat Bounce: TOL and LEN (January 5, 2007)
Another way of identifying housing's recent rise as a dead-cat bounce is to look at some charts of leading housing stocks: Toll Brothers (TOL) and Lennar (LEN). After noting my disclosure about being short TOL, frequent contributor Jed H. recommended LEN as a promising short as well. So let's look at their 3-year charts:
Compare the basic shape of TOL's meteoric rise and fall with the chart of Nasdaq's dot-com bubble in the January 3 entry below. Even this "recovery"/dead-cat bounce matches the classic bubble shape exceedingly well. The end result, however, is already being telegraphed by price weakness and the rolling over of MACD--a return to pre-bubble valuations.
LEN exhibits another classic pattern in technical analysis, the head-and-shoulders top, in which previous support levels are held for some time before the stock falls to lower support in a gradual stairstep down. The next support for LEN is $40, but neither the chart nor the fundamentals of the housing market provide much evidence that this price level will hold for long. Once it breaks below $40, the target could be much lower; Jed. H. suggested the low 20s as a potential target, and given that the housing bubble has only started a multi-year decline, this seems reasonable.
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