Watch Out for False Moves in the Real Estate Sector

Real estate has enormously benefited from low interest rates.

From March 2020 through the end of 2021, the iShares U.S. Real Estate ETF (IYR) doubled.

However, as the Fed increased rates this year, IYR has steadily fallen. From the start of 2022 to its recent low, IYR lost 35% of its value.

When we last checked IYR on October 3, we saw how selling pressure had pushed IYR into oversold territory.

Although IYR initially bounced from there, that move quickly lost momentum, causing IYR to head lower.

Now buying momentum is picking up again. So we’ll see what’s in store for IYR from here…

Clear Chart Patterns

On the chart below, you can see a classic bear pattern in action.

The 50-day moving average (MA – blue line) steadily trended down as IYR made a series of lower highs (A, B, and C)…

iShares U.S. Real Estate ETF (IYR)

Source: eSignal

Within the major downtrend, there have been several counter-rallies.

The red circles mark how each of these began with the RSI forming a ‘V’ out of oversold territory (lower grey dashed line). And those aren’t the only clear patterns on the chart…

After each of these counter-rallies topped out at A, B, and C, the next down leg began when the Relative Strength Index (RSI) formed an inverse ‘V’ – and retraced from overbought territory (upper grey dashed line).

When the 10-day MA (red line) crossed below the 50-day MA, it confirmed those down moves. They then began to gain pace as the RSI broke down through support (green line) into the lower half of its range.

On October 3 (red arrow), IYR’s selling momentum – that followed the peak at ‘C’ – had again pushed the RSI into oversold territory.

Although IYR initially bounced as the RSI rallied higher, the move turned out to be a false one. IYR ran out of steam in just a few days.

Since then, IYR has continued to drift lower. But the current action of the RSI has now caught my eye.

Let’s take another look…

iShares U.S. Real Estate ETF (IYR)

Source: eSignal

As the chart shows, while IYR was making lower lows (upper orange line), the RSI was making higher lows (lower orange line).

We know that when these two are diverging, a change of direction is often in the cards.

So, what can we expect from here?

Watch Out for False Moves

If the RSI continues to grind higher, then that’ll eventually push IYR higher too.

The longer that upward momentum lasts, the bigger that upward move should be. The next test for the RSI would then be to break into the upper half of its range.

However, even if that momentum peters out around resistance, it could still provide enough of a move to place a profitable long trade.

Remember, we’re not trying to get in on the next big trend. In today’s volatile markets, that’s a low-probability way to trade.

Instead, we’re trying to capture and profit from countermoves (or mean reversion trades) that go against the major trend.

If a countermove then transitions into a long-term uptrend, then we can always get back in on the trade.

But as always, we’ll need to keep a close watch on our technical indicators…

If the RSI’s recent break higher turns out to be another false move, then any up moves in IYR will be short-lived – and IYR will quickly resume its longer-term downtrend.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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