I’ve added homebuilder Toll Brothers to the list of stocks tracked by Rick’s Picks because it could hold the key to determining whether we’re in a bear market. A friend and former chat-room regular who runs a home construction company in the Philadelphia area alerted me to the fact that homebuilder shares – LEN, DHI, BZH and PHM among them — presciently led the stock market’s plunge this week by several days (see inset). My friend rates Toll Brothers as the most astute player in the game and says that as an investor, he always wants to be doing whatever Toll Brothers is doing. They are still acquiring land, he notes, and this would seem to imply the firm has not turned bearish on housing. We needn’t wait for evidence of such a change to surface in a quarterly report, however; as a practical matter, we should be able to predict it based on what TOL’s charts are saying. So far, they have yet to turn decisively bearish, but that could change as early as Wednesday with a print beneath the 43.74 low labeled in the chart.

Although we’ve seen broad averages swoon and recoup losses in mere hours, the reflexive bounciness of shares over the course of this bull market has been driven mainly by portfolio managers who have consistently underperformed index funds, dart boards and even chimpanzees.  They are nonetheless handsomely remunerated for throwing Other People’s Money at a relative handful of stocks — a bad habit that undoubtedly will thrive with the Dow Average on its way down to 5000.  The shares of home builders, on the other hand, are driven by more-astute calculations that take into account the true state of the economy presently and prospectively.  Although home builders are not immune from hubris, theirs operates at a much more modest threshold than the app-worshiping, self-aggrandizing, chest-thumping ape call of the Silicon Jungle. That’s why we’ll be following TOL’s chart with particularly keen interest in the weeks ahead. Stay tuned if you care. _______ UPDATE (Jan 31, 5:19 p.m.): The stock’s canny handlers gapped it fleetingly higher on the opening bar, trapping bulls badly and setting TOL up for a move to lower lows. My worst-case target for now is 44.49 (60-minute, A=50.09 on 1/26). _______ UPDATE (Feb 3, 12:25 p.m.): The 44.29 target still looks good. However, with stocks falling out of bed, let me introduce a new worst-case target: 42.21.  This means TOL will have an additional opportunity to bounce from 45.30, the midpoint Hidden Pivot support associated with the new target. Click here to see the chart. _______ UPDATE (Feb 7, 12:14 a.m.):  TOL has bounced sharply from a low midway between my worst-case target at 42.21 and the best-case at 44.29. The lower number is still in play theoretically although no longer likely to be reached. It will remain viable as long as 48.40 has not been exceeded to the upside. _______  UPDATE (Feb 8, 6:16 p.m.): TOL could now fall to as low as 38.45 if it decisively breaches the 43.13 midpoint support of the pattern shown.  _______ UPDATE (Feb 11, 6:33 p.m.): So far, the midpoint support at 43.13 is holding, since Friday’s 43.07 low did not breach it decisively. But until such time as the current bounce hits 47.81, the crucial importance of 43.13 will remain, along with the theoretical target at 38.45.