Next Week’s Fed Meeting Will Be Crucial to This Stressed Sector

After trading in a sideways band for most of the year, the iShares U.S. Real Estate ETF (IYR) has had a tough last few months.

The commercial property-focused ETF has holdings that range from storage centers to communication towers.

And since its December 2021 peak, IYR has lost over one-third of its value. It’s trading at its lowest level in 3.5 years.

A big part of IYR’s downfall has come off the back of the Fed’s rapid rate-rising cycle. Higher rates bleed through to commercial real estate in several key ways, including tighter lending for new development and more expensive debt refinancing.

Now speculation is growing on whether the Fed will hold rates steady (as many anticipate) or continue their hikes.

The Fed’s next meeting is less than a week away. So today I want to see how things might play out from here…

A Developing Down Leg

On the left side of the chart below, the 50-day moving average (MA, blue line) shows the tail end of IYR’s 2022 fall.

From there, IYR transitioned into a rangebound pattern.

Likewise, the 50-day MA meandered sideways. In September, it was around the same level as in November of last year.

iShares U.S. Real Estate ETF (IYR)

Source: eSignal

During this period, the 10-day MA (red line) crossed the 50-day MA multiple times in both directions.

The swings inside this pattern coincided with changes in momentum, as shown by the relative strength index (RSI).

For example, IYR’s peak in July…

As the chart shows, IYR’s rally petered out and reversed when the RSI peaked and tracked lower from overbought territory (upper gray dashed line).

From there, IYR made a trough and then counter-rallied in mid-August when the RSI formed a “V” and rallied out of oversold territory (lower gray dashed line).

But that rally proved to be short-lived.

IYR’s next down leg began to develop in September along with two bearish signals:

1. The RSI couldn’t break up through resistance (green line) and instead remained stuck in its lower band.

2. The 10-day MA, having crossed below the 50-day MA in August, began to slope lower with both MAs tracking down.

Yet it’s the action during October that has recently caught my eye…

Take another look:

iShares U.S. Real Estate ETF (IYR)

Source: eSignal

As you can see, the RSI has made higher lows (lower orange line) as it rallied out of oversold territory.

That trend higher in the RSI has coincided with IYR making a lower low (upper orange line).

When these two lines converge like this, it can often lead to a change of direction. That’s because a sustained increase in buying momentum will ultimately drive a stock price higher.

So what am I looking for?

The RSI Must Push Higher

The key thing to watch this coming week is the RSI’s action…

If the RSI continues to track higher (meaning more buying momentum), that could enable IYR to establish a base to rally.

The RSI pushing back up toward resistance could soon see IYR trading back around $78.

I’ll also be keeping close tabs on our two MAs.

If the 10-day MA turns around and starts tracking back up toward the 50-day MA, that would add further weight to any rally.

It could also give us the confidence to consider a brief mean reversion long trade against IYR’s prevailing downtrend.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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Do you think IYR can rally by the end of the year? Let us know at [email protected].