Trading Nation

This chart pattern signals even more room to run for the homebuilders, top technical analyst says

This is the best way to play the homebuilder breakout, trader says

Home construction stocks are building big gains.

The ITB home construction ETF hit its highest level since January 2018 on Friday, and has soared more than 50% from its December bottom. Craig Johnson, chief market technician at Piper Jaffray, thinks there could be even more room to run for the group.

"One of the trends that most are honing in on is that interest rates around the world still continue to trend lower," Johnson said on CNBC's "Trading Nation" on Friday. "Despite the recent push up in the last couple days, you are seeing that trend continuing. ... Lower interest rates should be a positive for the homebuilders, and that's exactly what you've been seeing happening this year."

Johnson points out that the ITB chart is signaling a pattern that could mean the group could be building up to even higher levels.

"You've made what looks like to us … an inverted head and shoulders bottom. We're kind of breaking above that neck line. Next resistance is around $46," said Johnson. It closed Friday at $43.23

An inverted head and shoulders pattern forms when a stock or ETF makes a lower low, an even lower low, and then a higher low. It typically indicates a downward trend is reversing.

Johnson says a few stocks like Lennar, D.R. Horton and NVR have been hitting the nail on the head.

"[These stocks] represent about 40% of the overall index. … We like a lot of those charts. Lennar still looks very good, Horton still looks very good from our perspective," said Johnson.

Chad Morganlander, portfolio manager at Washington Crossing Advisors, says that although interest rates have been going lower and causing excitement in the group, he wouldn't be breaking ground in these names just yet.

"When you look at the fundamentals of mortgage credit growth, and you look at the Federal Reserve's data on it, it's only growing at 2-3%, and you could see this and track this with new homes sales, that are up about 1.3 million per month. So, it's listless at best," Morganlander said in the same segment.

Morganlander says he would also avoid the group based on a valuation perspective. He suggests a different sector he believes is underappreciated.

"When you look at and include debt from their balance sheet and add it to market cap, this group is not undervalued. If you want an industrial, or you want more of a cyclical torque on the overall system, I would look at the industrial sector which we believe is deeply undervalued at this point in time," he said.