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DOUBLE TOPS


Pulte Plays with Double Top

08/12/04 09:26:37 AM
by Arthur Hill

The homebuilders have been leading the market for some time, but signs of distribution are starting to surface in one of the leaders.

Security:   PHM
Position:   N/A

DR Horton (DHI) was profiled at the end of July with a large head and shoulders reversal in the works. That pattern is still forming, with neckline support just below 25. While DHI is trading well below its March high, Pulte (PHM) moved to within striking distance of its March high and remains one of the stronger stocks in this group and in the market.

Figure 1: Pulte Homes daily chart.
 
Price action shows strength, but two key volume indicators suggest more distribution than accumulation. Both the accumulation/distribution line and on-balance volume (OBV) peaked in March and both remain well below their March highs. Even though PHM has yet to exceed its March high (58.15), this amounts to a bearish divergence because the indicators have to confirm strength in the underlying security. Despite this non-confirmation, the indicators have yet to actually break down and have traded flat the last few months.

With the indicators flat, the odds of breaking resistance are diminished and this makes a large double top possible. There are two levels to watch for confirmation. The early signal would be a move below 49, which would break the Oct-02 trendline and late July low. Final confirmation would come with a support break at 44.75 and the downside target would be to around 32 (58 - 45 = 13, 45 - 13 = 32). That is quite a move and I would expect some sort of support in the low 40s from the falling wedge at the end of 2003 (magenta trendlines).



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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