The stock market put in a rather strong performance upon returning from the long Labor Day holiday weekend. The S&P 500 went on a seven-day win streak and the Dow Jones Industrial Average logged three consecutive triple-digit gains before the markets experienced some profit-taking Thursday.
This rising tide took many boats with it, including the homebuilding sector, which was reeling from Federal Reserve Chairman Ben Bernanke’s hint in May that the Fed was considering reducing its bond buying program. The specter of rising interest rates cast a pall over the sector, which relies heavily on mortgage borrowing.
With tensions abating, at least temporarily, in Syria, the flight to safety in U.S. Treasury bonds is easing, so once again, rising interest rates are back in the fore. And this means the homebuilding sector’s brief rally is about to come to a screeching halt.
The iShares Dow Jones US Home Const. (ETF) (NYSEARCA:ITB), which tracks the performance of home construction stocks, materials and fixtures makers, and home improvement retailers, rallied in early September.
For the first time since May, it moved above its 50-day moving average, as well as the technical support level it broke below in August. It also moved above the trendline that guided it lower since Bernanke’s speech, and it looked as if its condition had flipped from bearish to bullish.
But this short-term strength was fleeting. On Sept. 12, the ETF rallied nearly 2.4% intraday before giving up the bulk of that gain to close near the low for the day. Candlestick analysts would label this action a gravestone doji, which as the name suggests, is ominous.
But we have to take the action since May in context. Chart analysts are always encouraged to examine a time frame larger than the one in which they are operating, and in this case we need to look at the weekly chart below.
The first thing we see is that the rising bull market trendline from October 2011 was broken to the downside earlier this year.
On June 20, the Fed reiterated that it would leave policy unchanged, and that stoked fears over rising interest rates once again. Individual stocks within the sector were slammed, including iShares Dow Jones US Home Const. (ETF) (NYSEARCA:ITB) component, PulteGroup, Inc. (NYSE:PHM), which was down as much as 11.7% intraday.
iShares Dow Jones US Home Const. (ETF) (NYSEARCA:ITB) did recover over the next few weeks to trade all the way back up to its now-broken long-term trendline, where the bears resumed control. In technical analysis, this is called a test of the breakdown where investors who got trapped in the previous selling saw their chance to sell their positions at the pre-sell-off price. It also gave bears that missed the selling before a second chance to do so. Supply overwhelms demand and prices head lower.
Was the September rally a false hope? It looks that way as trading volume fell throughout the move higher. There is a good chance that prices will fade back down to their late August and early September lows in the $20.35-$20.40 area.
If the bears push them below that zone, then a major long-term breakdown will be confirmed, and I would not be surprised to see a drop to roughly $17.25, or about 17% downside from current levels.
Keep an eye on the performance of this ETF. It has already broken its long-term trend to the downside and a fresh breakdown below support would bode poorly for investors.
Recommended Trade Setup:
— Sell iShares Dow Jones US Home Const. (ETF) (NYSEARCA:ITB) short on a break below $20.35
— Set stop-loss at 21.50
— Set initial price target at $17.25 for a potential 15% gain in eight weeks
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