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Homebuilder ETF is showing 'sign of exhaustion,' chart suggests — but it could be an opportunity

Trading the homebuilders after largest drop in construction since start of pandemic
Trading homebuilders after largest drop in construction since pandemic's start

There may be hidden opportunity in the homebuilders, two traders say.

Home construction stocks extended a week of losses on Tuesday after the U.S. Census reported the largest drop in housing starts since the beginning of the Covid pandemic.

The iShares U.S. Home Construction ETF (ITB) and SPDR S&P Homebuilders ETF (XHB) closed down nearly 2% on Tuesday. Rising construction material costs have weighed on the group in recent weeks.

The whole group appears to have room to the downside, Matt Maley, chief market strategist at Miller Tabak, told CNBC's "Trading Nation" on Tuesday.

He noticed that the ITB just had what chart analysts call an "outside week" — when a stock hits a higher high than the previous week's high, a lower low than the previous week's low and closing price below the previous week's low.

"It's a sign of exhaustion," Maley said. "When you see outside weeks, it just shows you that the group has moved too far."

He said the same is happening in the chart of Home Depot, which brushed off a much stronger-than-expected earnings report on Tuesday to close roughly 0.5% lower.

"The group will come down. I think it's got further to fall," Maley said. "But longer term, it's still a good play, in my opinion."

Shares of Lowe's could suffer a similar fate as Home Depot's, Quint Tatro, chief investment officer at Joule Financial, said in the same interview, a day before Lowe's also reported an earnings beat.

"I think it's priced to perfection and I think it's going to get hit regardless of what they say," Tatro said. Despite the better-than-expected earnings report Wednesday, the stock was down about 2%.

As for housing demand overall, he figured it "just stalled out a bit" because of rising input costs — which could allow investors to get into certain stocks at lower levels.

"That's going to hurt these stocks in the short term, but I think this presents the opportunity," Tatro said. "Investors need not really run away and hide from this group. I think there's some incredible value here. And as these stocks come in, I think you've got to get your shopping list out."

Topping his were Lennar, for its healthy balance sheet, along with Beazer Homes and Toll Brothers.

"I don't think the data gets any better in the short term, but it's 100% in my opinion due to input costs," Tatro said. "That demand is still there and it'll come roaring back and these opportunities will be there for investors."