Chart of the week: Time to sell this FTSE 100 housebuilder?

Called 'one of the greatest investment opportunities of the century', we analyse this blue-chip's future.

The 2007/2008 Credit Crunch was certainly savagely brutal with a decline from the 406p high to the amazing 3p low, which must rank as one of the greatest investment opportunities of the decade (if not century!).  Panic selling was the order of the day.

The rally has been stunning alright, but now the recent 190p high has hit the Fibonacci 76% retrace and on a growing momentum divergence.  Also note the most recent action has been contained inside my small-scale blue tramlines.  This pattern often appears at the end of a trend.  Any break below it would likely send the shares lower.

But, if it catches a bid soon, it could rally to test the 200p resistance area again.  Although possible, I set the odds of a sharp move above this zone very low.  It appears the path of least resistance is now down.

Is Taylor Wimpey a sell?

This major housebuilder is attracting much attention in the mainstream media with headlines such as: Is Taylor Wimpey's (LSE:TW.) share price the biggest bargain in the FTSE 100? And Should we be buying into Taylor Wimpey's 5.6% dividend yield?

Yes, in a low (and negative) interest rate world, a 5.6% yield appears a no-brainer, especially given the seller's market for homes.  And that attraction has helped the share price rally from the Christmas low of 130p to the recent high at the 190p area – a stunning near-50% advance.

Always in these situations after a sharp price run-up, I ask the basic question:  Is the bumper yield in any danger in the months/years ahead?  And has the dividend value been accounted for in the post-Christmas surge? In other words, what further 'bullish' developments can keep the share price aloft?  

One of the main drivers of this share is the state - and prospects - of the construction and housing market.  In the 2007/2008 credit debacle, the first in the line of fire were the housebuilders as they are super-sensitive to changing credit conditions.  In fact, the real estate sector led the whole US market down in 2007 and will likely do the same in the next downturn.

To my eyes, we are seeing a major turn in the UK housing market.  Sales volumes are dropping sharply and, finally, the year-on-year average house price is also in decline.  Also, negative comments of the shoddy build quality of the majors are emerging from the authorities as more major fault scandals are revealed.

The list of negatives goes on – with the builders engaging in disreputable gauging behaviour of many of their leasehold contracts (that they sell on to investors).  Finally, the markets that lead the way at the top end – London, Toronto, Vancouver, San Francisco – are rapidly coming off the boil.

With signs of strong headwinds, what do the charts indicate?  Here is the long-term weekly:

Source: interactive investor  Past performance is not a guide to future performance

The 2007/2008 Credit Crunch was certainly savagely brutal with a decline from the 406p high to the amazing 3p low, which must rank as one of the greatest investment opportunities of the decade (if not century!).  Panic selling was the order of the day.

But note the decline was in a clear 'five wave' pattern with a huge momentum divergence at the 3p low. And those two features were all the evidence an investor needed to forecast a sharp recovery – and fill his/her boots.  It took some time, but in 2012 the shares started picking up smartly and reached the Fibonacci 50% resistance level at 200p in 2015.

And it has not exceeded that level for four years, despite the hugely bullish UK property market.  The 200p zone therefore represents very stiff resistance.  Let's take a look at the recent action:

Source: interactive investor  Past performance is not a guide to future performance

The rally has been stunning alright, but now the recent 190p high has hit the Fibonacci 76% retrace and on a growing momentum divergence.  Also note the most recent action has been contained inside my small-scale blue tramlines.  This pattern often appears at the end of a trend.  Any break below it would likely send the shares lower.

But, if it catches a bid soon, it could rally to test the 200p resistance area again.  Although possible, I set the odds of a sharp move above this zone very low.  It appears the path of least resistance is now down.

For more information about Tramline Traders, or to take a three-week free trial, go to  www.tramlinetraders.com. 

John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.