KB Home once was one of the S&P 500 companies which is fairly unique for homebuilders that normally do not grow out of the “mom & pop” phase. As such this stock should be a good indicator of where the housing market might be going in the US.

3 years ago we also blogged about this stock. There we showed the a-b-c X a-b-c alternative count. At this point how exactly we came down is less relevant than how we rebounded. This stock hit its low in 2011, out of phase with the market in general and perhaps more aligned to interest rates for which we still believe the bottom was in 2013. The rebound is a perfectly clear A-B-C correction which implies that the trend is still down. It looks like we are in a third wave and the stock has already dropped 36%. The stock today is still trading at a p/e above 30, roughly double the norm and with 10-year Treasury notes at 3%.

Looking at the big picture it is not all that hard to assume that the bear market in the home builders stocks is over and that there are only blue skies ahead. Perhaps. Perhaps not. Looking at the more detailed chart it is very difficult to escape the notion that this is a diagonal, read wedge. These ONLY occur in 5th or C waves. They should retrace entirely to their base and beyond, so below $5. This diagonal is an absolute beauty in all respects. It has the brief overlap, the throw-over and it is well proportioned. Consequently we would expect a drop of at least $6 first and then we shall see what prevails. Do not buy and do put in a stop-loss!

The home-builder index etf supports this analysis. We thought this was a sell at about $26 back in Sept. As usual it went a little further but now sports a distinctly negative pattern.