With 2023 fast closing out, many stocks are trading at or near all-time highs.

One of those is D.R. Horton (DHI), the U.S.’s largest homebuilder (by volume).

After bottoming out in late October, it has been on an absolute tear, rallying 55% in just seven weeks.

One of the major drivers of DHI’s current rally has been interest rates.

Even before the Fed’s recent announcement, the market anticipated that the Fed would cut interest rates early next year.

Now the Fed has confirmed that it will pivot to rate cuts (although the timing of those cuts isn’t certain).

So let’s check if DHI could be vulnerable to a pullback as traders “sell the news”…

The Fed’s Comments

In the chart below, you can see DHI’s uptrend that ran through the middle of July.

Throughout this period, the Relative Strength Index (RSI) mainly remained in the upper half of its range (above the green line). That showed positive buying momentum.

D.R. Horton (DHI)

Source: e-Signal

Adding to the bullish sentiment, the 10-day Moving Average (MA, red line) tracked above the 50-day MA (blue line), apart from a brief dip in March. And both MAs trended higher.

Yet after peaking on July 20, DHI retraced.

The RSI had previously tested and held support (green line). But this time, it continued into its lower band, where it dragged DHI down.

That down move got further confirmation from the MAs. The 10-day MA crossed below the 50-day MA and both headed lower.

DHI’s down move petered out, though, with a common reversal pattern (orange lines).

As the chart shows, the RSI was tracking higher from oversold territory (lower orange line). Yet DHI was making lower lows (upper orange line).

This sustained buying trend stopped DHI’s fall and then caused it to rally.

That rally accelerated in early November off the back of the Fed’s comments that they may be near the end of interest rate rises.

When we checked in on DHI on November 13 (red arrow), DHI had just recently announced its Q4 earnings beat.

But the Fed had started walking back its comments, causing DHI to briefly track sideways.

Take another look:

D.R. Horton (DHI)

Source: e-Signal

At the time, the RSI was in overbought territory (upper gray dashed line). And we noted that the RSI would need to clearly reverse before we’d consider any short trade.

And as you can see, that was the right call.

The RSI tracked sideways (then higher) as DHI’s rally accelerated. DHI broke out to all-time highs.

Yet now the RSI is even further into overbought territory (red circle).

So how should we approach things from here?

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Snapping Back

As we talked about in November, we need to see a clear reversal from the RSI before considering a short trade.

The RSI recently formed an inverse ‘V.’ So it is showing promising signs. Yet for now, we’ll keep a close watch.

From here, if the RSI drops below the overbought line, we could quickly see DHI trade back around $140–$142.

There’s one other thing to remember when a stock rallies as strongly as DHI…

With mean reversal trades, we’re not looking for a longer-term trend. Instead, we take profits when a shock shoots too far in one direction and then snaps back the other way.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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