DR Horton Stock Plunge: Is Now the Time to Buy the Dip? | Don’t ignore this chart!

A tight supply environment in the housing market has helped DR Horton (DHI) deliver a strong year and a half. Last week, DHI’s results were down, falling short of Wall Street’s earnings expectations (though it beat returns) and signaling a weak quarter.

DHI’s stock price fell from a pre-recovery high of $157.93 to a low of $138.83. But is this dip available for purchase? Or is it a falling sword waiting to ensnare the unwary? To find out, let’s take a look at the daily chart of DHI stock (see below).

Chart 1. Dr. Horton’s daily chart. Buyers jumped in as soon as the price started consolidating below the 50-day SMA line.Chart source: StockCharts.com. For educational purposes.

The story here is very clear.

• DHI fell below the 50-day simple moving average (SMA), and buyers jumped in, assuming the decline was enough to send a buy signal.
• The Stochastic Oscillator is one of the indicators that confirms the “oversold” thesis.
• Additionally, the 50-day SMA and 200-day SMA are trending upward, with the 50-day well above 200. Both indicate strength.

This makes a reasonable “buy the dip” thesis, but a lot of fine-tuning can be used by filtering through different but complementary indicators.

Useful charting tips

DHI is filtered from StockCharts’. Entered Ichimoku Cloud Scanning is a great way to find potential “buy low” stocks. Check it out against the StockCharts Technical Rankings (SCTR). Check the score (and of course the chart itself) to see if it’s a tradeable prospect.

Chart 2. DR HORTON’S DAILY CHART USING ICHIMOKU CLOUD AND CHAIKIN FUND FLOW. Adding more indicators to measure downtrend and momentum can provide different angles for understanding “buy the dip” scenarios.Chart source: StockCharts.com. For educational purposes.

Compare the chart above to Chart 1 and determine whether a buy-side entry was premature.

• Reacting to the “oversold” reading of the stochastic oscillator Chaikin Money Flow It shows a sharp decline in purchasing momentum.
• The Ichimoku Cloud indicates bullish conditions, but provides a much wider range of support for the stock than the 50-day SMA. Still, it helps to pinpoint a more specific entry level.
• The purple line marks resistance levels that are likely to act as support.
• That potential support level is located just above the Fibonacci 50% retracement level, which in turn is located just above the lowest level of the cloud.

But are there other technical reasons that support the claim that DHI could see further declines before a reversal to the upside? Looking at DHI in a seasonal context, the answer is yes.

Chart 3. DHI’s 10-year seasonality chart. April, July and November are DHI’s peak seasons.Chart source: StockCharts.com. For educational purposes.

Looking at Doosan Heavy Industries & Construction’s seasonal performance over the past 10 years, February is a weak month for stock prices. March’s closing rate is very high at 78%, but the 10-year average return is 0.6%. However, April saw a higher-than-average closing rate and a strong average seasonal return of 5.6%. The strongest months are July (close rate 100% higher and average return 8.5%) and November (close rate 89% higher and average return 9.7%).

But how does DHI’s performance compare to the seasonal performance of the S&P 500?

Chart 4. 10-year seasonal performance of DHI versus S&P 500. Although the numbers may vary across the broader market, DHI’s bull month remains consistent.Chart source: StockCharts.com. For educational purposes.

The performance is slightly different, but still reflects the same scenario. February is the weakest month, April is the strong month, and July and November are the strongest months.

conclusion

Considering DHI’s 10-year seasonal performance on its own and relative to the broader market suggests that the current downturn is not quite over yet. CMF shows decreasing buying pressure and does not indicate significant bullish momentum. Adding the Ichimoku Cloud, Fib retracements, and simple support and resistance to the mix can help traders identify favorable entry points. So waiting is the problem. However, the circumstances are well set for a trade setup.

disclaimer: This blog is for educational purposes only and should not be construed as financial advice. You should not use any of our ideas and strategies without first evaluating your personal and financial situation or consulting a financial professional.