Home construction has been feeling the pressure of rising interest rates.
Since the start of 2022, mortgage rates have nearly doubled.
So, many folks have postponed or simply given up their dream of building a home.
It’s been a bruising time for a sector that had been enjoying a boom for the past couple of years.
At the time of its June low, the iShares U.S. Home Construction ETF (ITB) had fallen over 40% from the start of the year.
But after hitting that low, ITB has been showing promising signs of a rally.
Today, I’m going to check how this rally will pan out and identify some potential trades.
Let’s pull up ITB’s chart…
iShares U.S. Home Construction ETF (ITB)
Source: eSignal
It’s been all one-way traffic since the start of 2022.
After forming a double-peak in December 2021, ITB rolled over and headed down in early January.
This price action coincided with the Relative Strength Index (RSI) making a series of lower highs.
And this type of divergence between the RSI and stock price often warns of a potential change in direction.
Then, when the RSI broke strongly below support (green line), ITB began its real heavy selling.
The 10-day moving average (MA – red line) bearishly crossed down and accelerated below the long-term 50-day MA (blue line).
In addition, the RSI firmly stuck in the lower half of its band, continuing ITB’s downtrend.
It wasn’t until May 2 (red arrow), that we saw increasing momentum in the RSI. This was helping ITB build short-term support.
However, the RSI failed to establish itself in the upper half of its range (red circles). So, ITB lost momentum and its stock price went lower.
Take another look…
iShares U.S. Home Construction ETF (ITB)
Source: eSignal
As the chart shows, that recent down leg from early June caused ITB to make its current yearly low. And it put the RSI into oversold territory (lower grey dashed line).
But then, the RSI formed a ‘V’ and broke back up through resistance, beginning ITB’s current rally.
In a little over a month, ITB has now rallied 25%. And the 10-day MA has decisively broken back above the 50-day MA.
So, what can we expect from here?
Well, for this emerging rally to continue, the RSI needs to remain in the upper half of its band.
The longer it stays there, the higher the chances of a prolonged rally.
Also, the 10-day MA must continue tracking higher above the 50-day MA.
Right now, the RSI is quickly approaching overbought territory (upper grey dashed line).
So, what happens around this level is key.
If the RSI forms an inverse ‘V’ and then reverses back toward support, then the current rally will soon fizzle out – and provide a potential setup for a short trade.
But remember, even if the RSI goes into overbought territory, we can’t just jump into a short trade.
Before opening a position, we would need to wait for the RSI to reverse and track lower again.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
In today’s mailbag, a subscriber thanks Larry for a recent trade recommendation from The S&P Trader…
Hello Larry,
Thank you for another great trade recommendation. With a 100% gain on 20 contracts, I got a return of $10,323. That puts my options balance at $17,585 and SPX at $6,573. My account margin is down to $28,765 from about $45,000. I’m looking forward to next week’s trades.
– Mark A.
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