Trading Nation

Homebuilders are in correction territory, but one technician says you should buy the pullback

Last year’s hottest trade, homebuilders, just entered into a correction

After a stellar performance in 2017, the home construction ETF (ITB) is in correction territory, but one technician believes this might just be your best time to buy the group.

The ITB was the best-performing large-cap ETF last year, though it remained down around 16 percent from its 52-week high on Monday. There are, however, certain technical indicators that have Craig Johnson, a senior technical research analyst at Piper Jaffray, betting on a comeback for homebuilders.

While ITB has broken below both a support line that has been in place since 2016 and the 50-day moving average, it seems to be holding at around the 200-day moving average line, which Johnson believes is now support for the ETF to bounce.

"We've corrected right back to a good identifiable support, the 200-day moving average," he said Friday on CNBC's "Trading Nation." "I suspect that's the spot where perhaps a little bit more rational thinking comes in and we see a bit of a relief rally or perhaps more start to unfold."

But if investors were looking at one name in particular to buy, Johnson says Lennar would actually be a solid bet. The homebuilder is the largest holding in ITB, accounting for about 13 percent of its weight.

"Again, it pulled right back to its 200-day moving average, so [Lennar] would be another name that I would highlight," he said.

From a fundamental standpoint, Larry McDonald, founder of The Bear Traps Report, says the current rate environment may actually shift and benefit homebuilders. The market watcher says that the move in rates has been "swift" more so on the short end of the curve.

This means that the three-month Libor, which determines the rate at which banks charge each other for loans over that time period is actually rising.

This has created a "shock" in sectors like housing thanks to the increased cost of financing, which McDonald believes will result in rate conditions that are more beneficial to homebuilders.

"That would basically create a counter draw in economic data which I think near term could give the Fed a little bit of a pause and a little bit of caution," he said on "Trading Nation." "That could help bring rates back down, and that would give you a nice pop in the homebuilders."

"I think that's the way it's going to play out the next 60 to 90 days," McDonald added. "It's a tradeable countertrend rally in the homebuilders."

ITB was trading at around $38.81 on Monday.