Investor's Quiz: Volume Patterns And Group's Standing Spelled Trouble For KB H

On Aug. 22 we asked if you would buy, sell or hold shares of this home builder. KB Home (NYSE: - ) -- and its rivals -- were poised for a painful fall. The right decision was to sell.

But the impending crash wasn't clear in July 2005. KB Home had soared to 85.45 from a split-adjusted 8.47 in just five years.

The stock and the group had long won the attention of investors. Many of those who had missed it were seeking a chance to buy in.

At first, the retreat from that 85.45 high looked like the latest in a series of normal dips and consolidations for KB Home.

Indeed, the stock formed a cup, just 29% deep (point 1). That's an adequate correction for a growth stock.

KB Home had solid numbers going for it as the stock tried to break out in mid-January 2006.

Earnings had grown between 60% and 80% the past four quarters, the best showing in years. Sales were also gaining at an improved pace.

But there were a few problems.

First, volume on the right side's incline was light (point 2). While a breakout-style volume surge isn't required at that point, one would like to see activity pick up as prices rise.

Second, volume on the cup-with-handle breakout was not great. The buy point, 76.25, was taken out Jan. 5 (point 3). Volume kicked in two sessions later, although it only came to 47% above average (point 4). That's just barely OK, but not great.

Last, but far from least: The industry group had fallen apart badly. Its group ranking had sunk to 182nd out of 197 industries tracked by IBD. That's near rock bottom.

Just three months earlier, Building-Residential/Commercial had been in the No. 14 slot.

The group had peaked in the summer of 2005 as the housing market started to weaken. Also, the Nasdaq peaked Jan. 11. It stagnated for a few months, then fell hard in May.

More importantly, the group's leaders were under pressure.

Pulte Homes (NYSE: - ) tried unsuccessfully to break out in December. Toll Bros. (NYSE: - ) and Hovnanian Enterprises (NYSE: - ) were in slides since July '05. Other home builders' breakouts failed along with KB Home's.