Pulte Returns To Neckline Break

12/20/06 12:19:11 PM

by Arthur Hill

Pulte Homes rallied over the last six months, but resistance from a neckline support break is close at hand, and the advance looks corrective.

Security: PHM
Position: Hold

This weekly chart (Figure 1) shows Pulte Homes (PHM) from October 2004 to December 2006. The stock formed a head & shoulders pattern from February 2005 to May 2006 and established neckline support at 35. The neckline slopes up (gray line) and PHM broke neckline support with a sharp decline in May 2006. The downside target was to around 21 and the stock reached 26 in August. The head & shoulders target is found by subtracting the length of the pattern from the neckline break (48 - 34 = 14, 35 - 14 = 21).

FIGURE 1: PULTE HOMES, WEEKLY. PHM formed a head & shoulders pattern from February 2005 to May 2006 and established neckline support at 35.

Graphic provided by: TC2000.com.

Graphic provided by: Telechart 2007.

Broken supports turn into resistance. The April–June decline created an oversold condition, and the only way to alleviate this condition is with a corrective advance or a consolidation. PHM chose a corrective advance and returned to the neckline support break, which is now resistance. The March low marks support at 36 and this support break also turns into resistance. Taken together, a resistance zone has formed between 35 and 36.

FIGURE 2: PULTE HOMES, WEEKLY. The move over the last six months retraced 62% of the prior decline and formed a rising price channel.

Graphic provided by: TC2000.com.

Graphic provided by: Telechart 2007.

Now let's focus on the corrective advance. The move over the last six months retraced 62% of the prior decline and formed a rising price channel (Figure 2). Both the Fibonacci retracement and the pattern are typical for corrective advances. Combined with resistance from prior support levels, the cards are in place for a peak in the coming weeks. However, the channel is still rising. A break below the lower channel trendline and November low would signal a continuation of the prior decline (41 to 26) and target a move to around 20 (41 - 26 = 15, 35 - 15 = 20). This jibes with the original head & shoulders target. As long as the channel rises and the November low holds, it would be wise to at least respect the bulls.

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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HEAD & SHOULDERS

Pulte Returns To Neckline Break

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