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Bulkowski’s Blog Archive: BZH

Blog Posting: March 19, 2008, Housing Head-and-Shoulders Bottom?

The chart shows an unconfirmed head-and-shoulders bottom in Beazer Homes. It becomes a true head-and-shoulders bottom (HSB) when price closes above the neckline (shown in blue). None of the stocks that I will mention in a moment are confirmed, so buying them now is a risky endeavor. I show this as an example of the genre, so you can get ready for the future.

I like Beazer the best because the HSB forms at the bottom of a flat base. Once price pushes above the flat base, it stands a better chance of continuing the up move. Of course the housing industry is not the best performing of the bunch -- it ranks 29 out of 48 -- but it used to be dead last (48). What I find unusual is the number of housing stocks that are forming the same HSB pattern. Here they are.

• Beazer Homes (BZH) -- the one shown above
• Brookfield Homes (BHS) -- not a very pretty one
• ITB -- This is an exchange traded fund
• KB Home (KBH)
• Lennar (LEN). This has a wonderful shape and that may mean it is more likely to fail
• Toll Brothers (TOL)
• WCI Communities (WLI)

I mention the fine shape of the head-and-shoulders bottom in LEN. It has been my experience that the best looking patterns have a higher probability of failing, but this is not based on measured results, just a feeling.

Aftermath

Price confirmed the head-and-shoulders bottom when it closed above the neckline, three days after my blog post. Then price threw back (AB), climbed again (BC), and threw back again (CD). The unsteady move would give a trader or investor an upset stomach. While the swings may not look like much, they represent a 25% drop for the first swing (AB) and 20% for the most recent swing, CD.