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Homebuilding stocks rise despite plunge in housing starts — how two traders would play the move

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US housing starts see biggest drop in five years. Here's how to play the move

Homebuilding stocks held their own in the face of major headwinds.

The iShares U.S. Home Construction ETF (ITB), which tracks the group, hung onto gains for most of Tuesday's trading session before closing practically flat after a report showed U.S. housing starts had plunged to five-year lows in April. The SPDR S&P Homebuilders ETF (XHB), a competing fund, fell just over 1%.

The mixed market response may have been tied to a note from Citi Research suggesting that the worst may be over for the home construction industry.

"Construction activities have been one of the first to resume in many states that have begun phased reopenings," Citi economists wrote. "We would expect that both starts and permits have likely reached a bottom in April."

Danielle Shay, director of options at Simpler Trading, was in Citi's camp.

"Right now, you have millions of Americans that are unemployed, but at the same time, you have millions of Americans that are working in industries where they still have a paycheck, and now, they want a home with a lower interest rate," she said Tuesday on CNBC's "Trading Nation."

"For that reason, I think during the summer months we are going to see homebuilders trade higher, as well as key relative strength stocks like KB Home and Toll Brothers because they're going to have people buying homes with those low interest rates," Shay said.

KB Home and Toll Brothers' stocks fell about 1% on Tuesday.

Bill Baruch, president and founder of Blue Line Capital and Blue Line Futures, didn't find much that appealed to him about the homebuilding stocks.

"There's not much to love here," he said. "If you look at the XHB, the sector ETF, it's 60% off the March low. This is an opportunity to reduce your exposure and there's resistance up here."

Not only is the XHB bumping up against its 0.618 retracement — a noted Fibonacci level technicians use to determine when a given stock might encounter resistance — but it's also facing pressure from its 200-day moving average around $41.86, Baruch said.

The XHB ended trading at $38.50 on Tuesday.

"Although there are some stocks in this sector that could benefit more, I'd rather be in a space like Home Depot and the home improvement companies," Baruch said. "But if you're focusing only on this sector, $34 is going to be some support [for the XHB]. If it can build a floor there, it could meet the 50-day moving average, and that's where you want to look to be a buyer, not up here."

The XHB's 50-day moving average falls at $32.73.