On February 23rd, Robert Toll, the CEO of Toll Brothers defiantly declared on CNBC after reporting blowout earnings that "shorts would get crushed" (it should be noted that the Robert cashed in 110 million just 2 days following – in fairness he cashed in the same amount two months earlier so could be part of a sell program).  Since that day, shorts have been anything but crushed.. and are on the verge of racking up more gains if key support levels can’t hold.  The stock has been digesting recent losses and consolidating in a tight pattern below support of the 50 day moving average.  Based on the deteriorating technicals, its highly likely the consolidation will give way to more selling and and provide a clear short entry.

Taking a look at the Housing Index, it too is hanging on to the next level of support around 475 after slipping below the 50 day moving average.  Its clearly finding resistance here and I wouldn’t expect 475 to hold either.  Next stop – 450.

Stocks of a few other homebuilders show similar scenarios.. barely clinging to support.  KB Homes still has support of the 50 day moving average, but I can’t imaging it hold there for much longer.  Support levels on the way down tend to occur in 10’s and will provide clues to the health of the stock.

The chart of Hovanian looks almost identical to the chart of the housing index – below support of the 50 day moving average, but holding at previous areas of consolidation and psychological support at around 50.  A drop below this support area would signal that it’s headed for 45, which is the next area of support to watch.  Note the heavy institutional selling throughout 2005.