Can KB Home Rebound?

There was a lot of carnage in the market on Tuesday, January 13 across the board. However, one of the biggest disasters was in the shares of KB Home (NYSE: KBH).

A day that began with so much promise for the issue turned into one of the ugliest technical breakdowns it has experienced since the days of the financial crisis.

Premarket Action -- Contrarians' Field Day

Before the open, the company reported Q4 revenue growth that exceeded the Street's expectations. The GAAP EPS did not compare because of a net income tax benefit of $824 million. The Street seems to be fixated on the higher than expected revenue ($796 million versus $778.46 million), and sales that were higher by 29 percent. The stock was as high as $17.44 during premarket trading.

That level coincided with its December 1 high ($17.57).

However, once the true liquidity came in at 9:30 a.m., it was lights out for the issue. After opening at $17.15, it briefly rallied to $17.25 and reversed course.

Opening Buyers Trapped

After treading water at the $17.15 level for the four minutes of trading, someone began to sell aggressively. Once it breached the opening price, those who purchased shares off the open began to bail and pushed the issue well under $17.00, reaching $16.56 by 9:48 a.m.

What took place after 11:30 was a classic technical breakdown. KB Home breached the triple bottom at the $16.40 level and continued to decline. Now the supposed “good news” was “not-so-good news.” Along with a cratering market, the issue annihilated any supposed support level and surpassed its October Ebola low ($13.75), reaching $13.40 before rebounding to settle at $13.87.

That low mark was the lowest level for the issue since it bottomed at $13.09 in November 2012.

Holding Up, So Far

The good news for shareholders is that the issue has not taken out Tuesday's low, finding support ahead of that level at $13.56 and attempts to recapture the $14.00 level. Despite a duo of downgrades, it is trying to rally. In addition, the issue is showing some positive relative strength compared to the broad market. However, its losses on Tuesday certainly exceeded the broad market's decline, making the situation not out of the ordinary.

Before Wednesday, January 14's open, JPMorgan downgraded the issue from Overweight to Neutral and lowered its price target from $19.50 to $15.00. Also, Susquehanna downgraded the issue from Positive to Neutral.

Looking Forward

The bad news for shareholders is that the technical damage inflicted on the issue on Tuesday is not easily rectified for a few different reasons. First of all, what will be the catalyst to take it higher?

With earnings just announced, there will not be any earnings announcements to analyze for the next three months. Also, Wall Street analysts that are trapped in the issue could issue downgrades and lower price targets over the short-term.

Most importantly, there are many buyers looking for a rally to sell. There were likely bottom pickers in Tuesday's session (illustrated by 35 million shares traded versus its 20-day average volume of less than 5 million).

That, coupled with the longs prior to Tuesday's debacle, and aggressive short sellers looking to push the issue lower, may indicate lower prices on the horizon for KB Home.