DHI: Let Us Trust the Technical Analysis

By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

With the market being a bit overheated, it needs a good correction, after which prices will become attractive for investors, who are taking profits on good company reports. The news overall is still positive, and in this situation, only inexperienced traders are ready to buy securities at maximum prices and outweigh possible drawdowns that can last more than a year.

In this regard, let’s take a stock much dependent on technical analysis, with fundamentals not being that important.

Even in the face of a declining market, there are stocks that could be bought, provided that they are not at their historical highs.

From the point of view of technical analysis, DR Horton, Inc. (NYSE: DHI) is a good option.

DR Horton, Inc. is a US state-owned housing company registered in Delaware, which forms part of the S&P500 Index. In 2017, the company was recognized as the largest housing developer in the United States.

DR Horton, Inc. manages three branches: Emerald Homes operates in the luxury real estate segment, Express Homes is designed for first time home buyers, while Freedom Homes is focused on customers over 55 years old.

The debt to equity ratio is 0.35, which indicates the financial stability of the company. Only in 2008, during the mortgage crisis, it was over 1.00, and shortly after the company’s revenue gradually grew up, while the debt remained at the same level.

The company’s quarterly reports are subject to seasonal factors, but they are still better than last year.

Technically, there’s an uptrend on W1, as the price is still above the 200-day moving average, which has been supporting the stock over the last 7 years. Every time the price went down to the moving average, a reversal followed, and the price made new highs. There’s some logic in it: the price approached the moving average five times, and four of them in fall, after which in November the stock rose again. Of course, this could well be explained with fundamentals. In technical analysis, however, it is important to find a pattern that will increase the likelihood of an event, and the news factor triggering the impulse may appear a little later.

At the moment, the price is somewhere where the probability of its rise is much higher than the probability of decline.

In technical analysis, the possible direction of a price move is determined first on larger time frames, after which it is necessary to switch to shorter ones in order to find a confirmation.

As a result, analyzing D1, one can notice the consolidation between $35 and $37.

The consolidation in any range usually indicates the uncertainty of market sentiment, when traders do not have a clear plan and trade in both directions. This leads to short-term price impulses that end as quickly as they started because the number of people willing to buy equals the number of those willing to sell. Due to this, the balance of supply and demand is maintained, leading to the stock price remaining in a narrow range. Consolidation also has another reason, however: a large buyer.

When a large buyer appears in a stock, they may not always take over a position in one trading session if the current liquidity is insufficient. In addition, one has to disguise their purchase, otherwise, the stock price will skyrocket, and they will not be able to book the planned profit.

As a result, the large buyer begins to systematically ‘scale in’ in small parts within a certain price range with somewhat ‘blurred’ boundaries. But at the same time, every time the stock hit $35, it went up, and thus for 7 sessions in a row.

Before their final attack, the buyer ‘lets the price go’, which makes it either go up or, conversely, sink even lower. If the price reaches the bottom, the buyer starts acting more aggressively at better rates, which is accompanied with a surge in volume (clearly visible when the level of $35 is broken out).

For a more accurate analysis, however, it is necessary to pay attention to even shorter time frames to make sure the predictions are correct. When a large buyer scales in, they either do this with a limit or a market order. Limit orders are preferred, as a large market order may provoke very choppy prices. On H1, we can see it was a limit order indeed, as after the price broke out $35, it stopped near $34 and could not fall below during the next two trading sessions.

The subsequent attempt to fall below $34, meanwhile, led to the fact that at the end of the trading session the stock got back to $35, i.e. the buyer had already begun to actively defend their position. The scaling-in process is over, and they are now waiting for the price to rise.

Retail traders are unable to hold the price or protect their positions at a certain level, but they don’t actually need that. Instead, understanding where the large buyer or seller holds their positions is enough, placing a stop at these levels. The large trader will take care of the rest.

Thus, one can see the large buyer resumes their activity when the price drops below $35 and acts even more aggressively when it’s approaching $34. Basing on these assumptions, we can single out support between $34 and 35. Accordingly, the stop may be placed below the low at $32.50.

In technical analysis, everything is based on the historical data, previously seen patterns and assumptions, but you can never know for sure what will actually happen. Therefore, you always need to determine the entry and exit prices. Just note: the first target for Horton may lie at $45.

Disclaimer

Any predictions contained herein are based on the authors’ particular opinion. This analysis shall not be treated as trading advice. RoboMarkets shall not be held liable for the results of the trades arising from relying upon trading recommendations and reviews contained herein.

Having majored in both Social Psychology and Economics, I went on to continue my education in post graduate. Later I worked as a team lead of a tech and fundamental analysis lab in the Applied System Analysis Research Institute. This helped me to acquire all necessary skills and experience to become a successful trader and analyst, as well as a portfolio manager in an investment company. I'm a pro in the financial field and the author of articles for various international media. I also hold the position of Chief Analyst at RoboMarkets.