Larry’s note: Welcome to Trading with Larry Benedict, the brand new free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us.
My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’ve been featured in the book Market Wizards, alongside investors like Paul Tudor Jones.
But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it…
Any change in demand for new homes has major implications for the economy…
Not just in terms of direct construction jobs, but right through the supply chain that supports it.
As demand surged throughout last year spurred on by low interest rates, the sector faced two key challenges…
First, a shortage of skilled workers created a jump in wages. Plus, increased demand for building materials – already hampered by production cuts from COVID – saw material prices spike right across the board.
Together they fueled a rise in new home price inflation and saw consumers rush to lock in new building contracts before prices got too far away from them.
However, as you can see in the chart of the iShares U.S. Home Construction ETF (ITB) below, that all changed as we ran into the end of 2021…
With the Fed finally awake to the real dangers of higher inflation, suddenly interest rate rises – meaning multiple rate rises over several years – are back all over the news.
iShares U.S. Home Construction ETF (ITB)
When we last looked at ITB (red arrow), it was rallying strongly. Having traded sideways throughout mid-2021 – as defined by the long-term 50-day moving average (MA, blue line) – ITB broke higher out of its range…
After a short pullback in mid-November, ITB went on to make its all-time high of $83.43 (A) on December 13. This coincided with the Federal Reserve’s last meeting for 2021 (December 13-14), where interest rate rises were put right back on the agenda.
Since then, ITB ricocheted between the two green lines on the chart (A to C being resistance, with B to D being support).
Right now, ITB is again testing that support level…
When ITB recently bounced at ‘B’, it briefly touched the 50-day MA before trading back higher. However, in the most recent fall to ‘D’, you can see that this time ITB fell strongly down through the 50-day MA.
While that suggests the start of a bear pattern, it’s the short-term 10-day MA (red line) that I’ll be watching for confirmation of a further downwards move. If the 10-day MA breaks below the 50-day MA – along with ITB falling below support – that will confirm this recent down move is gaining momentum.
As we touched on regularly last year, the action around price levels is key. When a price breaks through support, that level can change into resistance (and vice versa). That’s what I’ll be looking for around this support level.
If ITB breaks below support, that could offer the chance to go short. The next key price level for ITB to test is its October 2021 low just above $65.
The other thing I’m watching is the Relative Strength Index (RSI) towards the bottom of the chart below…
iShares U.S. Home Construction ETF (ITB)
With the RSI also breaking down below support (50%), it’s now closing in on oversold territory (on or below the lower grey horizontal line). When the RSI last tested this level in October and rebounded, that led to the rally that saw ITB gain over 20%.
Right now, my immediate focus remains on whether ITB can hold support at around $75.
The chart is also showing that ITB is becoming more volatile. A quick glance at the price action since hitting its high at ‘A’ shows just how much bigger ITB’s recent price swings have been compared to those of last year.
And with the Fed recently hinting at tightening more quickly than it originally foreshadowed, that means that for now this volatility is here to stay.
As a trader, this volatility is exactly what you want to see. It’s the kind of market that will offer plenty of trading opportunities as we get stuck into another new year.
Editor, Trading With Larry Benedict
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