Fletcher Building Limited (ASX:FBU) is involved with building products, concrete, steel, construction, property and housing and distribution.

The long-term chart of FBU is quite simple. From 2001 to July 2007, the stock experienced a long-term bullish trend that drove the price from $1.75 to $12. It’s a 585% gain in 6 years.

However the stock has been retracing a large part of this gain. From July 2007 and the historical high price posted at $12, it has declined by 61% to reach a recent low at $4.66 on July 16 this year.

The stock has found some support there and has already bounced back. We think there is more to come. As this stock is trendy and is obviously uncorrelated with indices, the momentum indicators suit well its technical analysis.

Those indicators are well oriented. They turned bullish in the first fortnight of July and strengthened during the past few weeks. Therefore there is a conjunction of signals that argue for a further price development on the upside.

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The MACD has already crossed above its signal line. It has also crossed above the zero line, which is a confirmation that there is a medium-term bullish trend. Why does it strengthen the existing bullish signal?

Well, traders also watch for a move above or below the zero line because this signals the position of the short-term average relative to the long-term average. When the MACD is above zero, the short-term average is above the long-term average, which signals upward momentum. The opposite is true when the MACD is below zero. Consequently the zero line often acts as an area of support and resistance for the indicator.

The Momentum indicator which is a measure of the velocity of price movement is also positive. It bottomed in July, turned upward and has been rising since, crossing above its 100-level signal line in the first fortnight of August. The trend is there, and it may remain your friend as the overbought configuration has not been reached yet (according to the RSI). It means that the trend is likely to continue before any potential significant corrective pull back.

Moving averages are used to emphasize the direction of a trend and to smooth out price and volume fluctuations, or “noise”, that can confuse interpretation. Typically, upward momentum is confirmed when a short-term average crosses above a longer-term average. Last month, the 10-day moving average (in blue) crossed above the 50-day moving average (in red). Today this 10-day moving average acts as the first support to the price action.

The current correction of the one-year bearish trend is expected to continue on medium-term perspective. The first intermediary resistance line is the 23.6% Fibonacci retracement level around $6.4 (since the stock has been bouncing back the high posted is $6.19). If the trend goes on, the most important levels to watch will be $7.4 and $8.3, which correspond to the 38.2% and 50% ratios.

The UK housing sector, already best by plunging demand and prices, has been hit with a potential body blow which could tip the economy into a deep recession.

Taylor Wimpey, the country’s biggest home owner, has shocked the UK market and observers with the news that it has failed to agree a deal with potential new investors, forcing the stricken house builder to admit on Wednesday that it could breach banking covenants if the housing market does not recover.

Coming with the news of poor sales figures for big retailer, Marks & Spencer, the Taylor Wimpey news will undermine investor confidence across the board.

The company had been looking for around 500 million pounds ($A1 billion) in new capital from existing big and new shareholders, and had promised to write down the value of its land bank in Britain, Spain and other countries by around 660 million pounds (around $A1.4 billion). The write-down has happened, but the new capital couldn’t be found. No one wanted to commit quickly to the refinaicng.

The shares plunged 47.5% overnight. Shares in other builders were also hit, with Barratt Developments down 30% to 39½p (about 90 cents) and Persimmon losing 17% to 247pence (around $5.10).

UK brokers said they would be reviewing the industry’s health and issuing upgraded estimate sales, earnings and dividends. One, Cazenoves, said in a note that the news wasn’t good for the homebuilding sector.

The company’s CEO told the media that the recapitalisation failed because “the negotiations were impacted by market movements in the past couple of days – both in house building and generally.”

That’s a reference to the slump in house prices, as measured by Nationwide Building Society and the 28% drop in new mortgage loans from April to May. There’s just no demand for new homes in Britain and the industry has too much capacity and too many players. It is in a far worse state than in Australia.

Quite obviously the new and existing shareholders approached to participate in the refinancing wouldn’t play because they have no confidence in the outlook for UK housing and the economy generally. 

Taylor Wimpey management seem not to understand that, given the stated confidence of finding new finance as the year goes on.

The news came as Britain’s largest house builder by volume unveiled a grim trading update, with private housing net reservations down 45% in the first half, compared to the same period of last year. (contracts)

The company says the falling demand for new homes has hampered its ability to repay debt, despite slashing costs by closing one-third of its British offices stopping all land purchases.

The company has net debt of 1.7 billion pounds, or around $3.5 billion, down 200 million pounds or just over $400 million since April. But even that disciplined approach to cutting debt wasn’t enough to convince investors to toss in new money. They are worried the company will fail and they will be throwing good money after bad.

The company said it is still in compliance with its debt covenants, although it added: “Without an amendment to the terms of our banking facilities, in certain negative market scenarios we might breach one or more banking covenants at the first testing date in 2009.” That could happen by next February.