The takeaway from Jackson Hole is that higher interest rates are here to stay.
No matter how much pain it causes the economy, the Federal Reserve has committed to increasing rates until inflation is back under control.
While that news saw major indices finish the week in red, it had even bigger implications for home construction – a sector particularly sensitive to the interest rate cycle.
The iShares U.S. Home Construction ETF (ITB) was already facing some technical hurdles when we checked it out a few weeks ago (red arrow on the chart below)…
So today, I’m going to see how the Jackson Hole meeting plays into ITB’s stock price and some potential trades.
A Long-Term Downtrend
You can see ITB’s long-term downtrend in the 50-day moving average (MA – blue line) on the ITB chart below…
iShares U.S. Home Construction ETF (ITB)
Source: eSignal
This downtrend got underway when the short-term 10-day MA (red line) crossed down below the 50-day MA at the start of 2022.
Although ITB tried to rally in May – with the Relative Strength Index (RSI) briefly breaking up through resistance (green line) – that move petered out at ‘A.’
From that peak in June, ITB again sold off sharply, prompted by two bearish signals…
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The RSI broke down through support and tracked down to the bottom of its range.
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The 10-day MA broke back below the 50-day MA… meaning a continuation of the broader downtrend.
This sell-off from ‘A,’ however, ran out of steam with the RSI going into oversold territory (lower grey dashed line).
With the RSI forming a ‘V,’ this initially saw ITB bounce off its June low. Then, as the RSI broke up through resistance and into the upper half of its range, ITB’s rally was able to gain further momentum.
But as ITB made a series of higher highs (upper orange line), RSI was making lower highs (lower orange line).
We dissected this divergence pattern when we looked at ITB on August 11 when the RSI was testing support.
While ITB subsequently tried to rally higher, the RSI made another lower high, and ITB’s rally came to an end.
After falling through support, the RSI tried but failed to break back through resistance and most recently has turned lower.
So what can we expect from here?
Further Downside Ahead
Let’s take another look at the chart…
iShares U.S. Home Construction ETF (ITB)
Source: eSignal
For ITB’s June rally to resume, we’d need to see the RSI break back into the upper half of its range and stay there.
We’d also need to see the 10-day MA start accelerating higher away from the 50-day MA. Any prolonged rally beyond that would then need to see the 50-day MA continue tracking higher.
However, with the two MAs moving closer together, that move is looking unlikely for now. And the news about more rate hikes ahead suggests there could be more downward pressure on this sector going forward.
So, if the RSI continues to track lower and remains in the lower half of its range, then that’ll see further momentum to the downside.
The 10-day MA then breaking decisively below the 50-day MA would then add further conviction to ITB’s re-emerging down move… and set us up for a potential short trade.
From there – with buying momentum firmly against it – it might be only a couple of weeks before ITB re-tests its June low.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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