HD XHB 

I am going to suggest that Home Depot ( NYSE: HD ) be opened as an active trade on Tuesday. I like the way the stock has set up along the 50, it could be tighter, it’s not the perfect entry at all but I like the way the sector is acting. The Homebuilding Index ( NYSEARCA: XHB ), the ETF; this is one of the strongest ones, Home Depot ( NYSE: HD ) is in one of those.

Their fundamentals are pretty good. Their growth isn’t really accelerating on top of the accelerator but it is pretty good. And so fundamentally, technically, it’s all good. Sector-wise it’s all good. If you watched my webinar from earlier this week you know that 50 percent of a stock’s movement typically comes from sector and industry group inclusion. And so this thing, really, is firing on all cylinders.

Now, it’s not a super volatile stock. I am suggesting that our people get in around here. Again, I don’t know what’s going to happen Tuesday, except that I am going to wake up down in Mexico and not be thinking about the market., so I can’t help you there. But what I am suggesting they do is, really try to buy it at 331.00 or less, don’t chase it up. If you can buy it around this level and then you keep a stop down here below this day’s intraday low, you’ve got about 4 percent, between 4 and 4.5 percent risk.

Now, this is not a super volatile stock. If it runs up here to test this high it’s a 3 percent gain. So in this way, if you are kind of structuring your trade, what’s my maximum risk? Well, we know that, it’s down here at 4.5 percent. What’s my potential reward? And you could say, oh, I think it’s going to 400.00. Okay, well hope isn’t a trading method, it’s not an analytical way to go.

As I look at this, this is the last resistance, 340.00 is where I could expect this to go if I am factoring in a risk/reward profile and that is 3 percent. So I am risking 4 percent on the downside to make 3 percent on the upside. That doesn’t really quite work for me. And so do you know what you could do instead? You could say, I don’t want to have my stop down here. I want to have my stop down here at 319.00, something like that. So now what do we get? We’re back here at 330.00, down to 319.00, that’s 3 percent that we are risking.

Now, what’s our potential reward on the upside? It’s 2.5 percent, if we want to look all the way up to 340.00, which is what I would do, I would say 340.00, it’s almost 3 percent. So this is a better risk/reward profile and you can even go tighter, you can do here, it’s your trade. I am just laying out the different ways to do it. What I told our members is, I’m keeping this one because I like to try to trade stocks for a longer holding period and make bigger money on them than just 5, 6, 7 percent, or something. That’s how I am looking at Home Depot ( NYSE: HD ).

XHB LEN HOV MDC DHI TOL LGIH 

I want to go over the Homebuilders ( NYSEARCA: XHB ) today. There are some of these stocks that are in a pretty good situation. This is forming a pretty nice base here, it’s a high base. You could say it’s starting around here, it’s starting to look like a cup and handle here or a potential cup and handle. Now, there’s no handle so we are just looking for this kind of thing.

If this would stay below $80.00 for a while and then break out, now we would really have something. So I wouldn’t be buying this stock here, you are kind of too late to buy the dip and too early to buy the breakout. So it is really more of a higher-risk trade simply because the potential reward is uncertain.

Either way, you are not going to go wrong because you are only risking 4 or 5 percent on the downside. If you do just say, well just screw it, let’s do it. I am going to buy it because I think the stock is going to break out. Then if it turns out that you are wrong, the stock pulls bank instead. You have got to put a BAND-AID on, not a tourniquet, and so that could work. Again, I would coach you not to do that. You either wait for the stock to pull back closer to say, the 50-day moving average or you wait for a bona fide breakout.

Now, if we look a some of the stocks in this group, Lennar ( NYSE: LEN ) has kind of a similar look. It’s very similar and so I would kind of look at this in the same way. Here, I would really need to see it either break out above 110.00. They report earnings on the 13th, so just eleven days from now. I would look for it to break out above 110.00 on volume or pull back say, closer to 105.00, 104.00, something like that. I don’t think you are going to pull back to 100.00.

Another stock that I am looking at is Hovnanian ( NYSE: HOV ). Notice the liquidity, there is none. The stock, at 73 thousand shares, you can put in an order to buy the stock at a limit price and then go have some lunch. And then maybe it will be filled when you get back. It just really doesn’t trade that much but the pattern is the pattern.

You can consider this, M.D.C. Holdings ( NYSE: MDC ) or Richmond American. This is a pretty nice chart pattern too. So I am really looking for more of a break out on these home builders. DHI ( NYSE: DHI ) is giving you the same exact thing. Again, all the chart patterns are a little different but the similarity is, that they have all basically been forming bases for quite a few months. And now on some of these like this, it is actually narrowing a bit.

And then you look at Toll ( NYSE: TOL ), that doesn’t work for me. It is kind of up too much, it doesn’t work for me. That would have been a 2-weeks ago thing, not a “now” thing. The bottom line is, there are a lot of ( NASDAQ: LGIH ) good potential trades in the Homebuilding ETF. If you just want to trade the XHB ( NYSEARCA: XHB ), that will be your smoother trade because everything gets kind of averaged out.

What I would suggest doing is, looking at the stocks that I just mentioned; writing notes, putting stock alerts on there so that you can be taking action on a stock when it does what you are thinking it’s going to do. As opposed to taking action on a stock and then hoping that it does what you think it’s going to do.