KB Home - KBH - close: 7.33 change: +0.43

Stop Loss: 6.70
Target(s): 9.50
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
It looks like some of the homebuilders may have bottomed. Maybe all the bad news for this industry is finally priced in. KBH appears to have formed a bullish double bottom with the lows in August and October. The last couple of weeks have seen KBH consolidating sideways under technical resistance at the 100-dma. If shares can breakout it could see some short covering.

The most recent data listed short interest at more than 50% of the relatively small 65.4 million-share float. That's definitely enough fuel for a significant short squeeze.

The 100-dma is at $7.42. I am suggesting a trigger to open bullish positions at $7.55. More conservative traders will want to wait for a rally past possible resistance at $7.60 instead (try a trigger at 7.65). KBH can be a volatile stock so we need to use a wide stop loss. This raises the risk profile on this trade. We'll use a stop at 6.70, which is under Wednesday's low.

We will aim for $9.50 but the exponential 200-dma might be overhead resistance (currently at 9.11).

Trigger @ 7.55

Suggested Position: buy KBH stock @ 7.55

- or -

buy the Jan $7.50 call (KBH1221A7.5) current ask $0.84

Annotated chart:

Entry on November xx at $ xx.xx
Earnings Date 01/09/12 (unconfirmed)
Average Daily Volume = 5.8 million
Listed on November 10, 2011