Is This The Beginning Of A Downtrend In Home Builders?

 Is This The Beginning Of A Downtrend In Home Builders? 

By Casey Murphy

 http://www.investopedia.com

 

Analyzing the state of the housing market in the U.S. is no easy task and has many different segments that can be hard to analyze. Home sales, construction spending, pending sales, indexes and lumber prices are a few of the commonly used metrics for gauging the trend’s direction and strength. Of those mentioned, one of the most reliable indicators used by active traders is that of lumber since it is used as a primary input. In a recent article, we took a look at lumber prices and the weakness shown on many of the charts is implying that the housing market may be about to head lower. In the article below, we’ll take a look at several assets related to the home-builders to determine the state of the market and where it could be headed next. For related reading, see: Will Homebuilders Continue To Outperform?

Homebuilders ETF

Investors interested in analyzing home-builders typically turn to common exchange traded funds such as the SPDR S&P Homebuilders Index (XHB). Taking a look at the chart below, you can see that the price has recently broken below its 200-day moving average. In technical analysis, a price trading below its 200-day moving average typically is used to suggest that the long-term momentum is on the side of the bears. Furthermore, traders will watch for the moment where the 50-day moving average (blue line) crosses below the 200-day moving average (red line). This bearish crossover (shown by the red circle) is a very common sell signal and is known as the death cross. This crossover traditionally marks the beginning of a long-term downtrend and many bearish traders will likely look to protect their positions by placing stop-loss orders above the 50-day and 200-day moving averages, which are currently trading at $35.89 and $36.19 respectively. The close proximity to the resistance is creating an ideal risk/reward scenario for the bears and the bulls will likely want to remain on the sidelines until bullish signals start appearing on the charts. For more, see: Trading Bearish Reversals

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Leveraged Homebuilders ETN

Traders who want to increase the leverage of their positions may want to investigate the ETRACS Monthly Reset 2x Leveraged ISE Exclusively Homebuilders ETN (HOML). This fund seeks to track two times the performance of an index of home builders. Based on the chart below, you can see that it is currently trading within a defined downtrend and that the price action is nearing the resistance of a descending trendline. Bearish traders will likely watch this ETN closely and see how it behaves as it approaches $26.07. An increase in selling volume along with a tightened trading range over the coming trading sessions will signal a continuation of the downtrend and will likely trigger entry points for short orders. (For more, see: Introduction To Leveraged ETFs)
 

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Lennar Corp.

Investors who want to trade home builders outside of ETFs may choose to investigate popular players like Lennar Corp. (LEN) or other components of the funds shown above. Taking a look at the chart below, you can see that the pattern is similar to the XHB chart shown above and the move below the 200-day moving average suggests that the long-term trend could be shifting in favor of the bears. It is interesting to note on this chart how the 50-day moving average hasn’t yet crossed over its 200-day moving average. Active traders will keep a close eye on this chart because a moving average crossover could be the catalyst that triggers a move lower.

 

The Bottom Line

Based on the charts of a couple different home-builder funds and by taking a look at their components it appears that the uptrend in the home-builder sector is reversing. Prices are trading below key moving averages, bearish crossovers between major averages and nearby trendlines are all suggesting that there is a fundamental shift occurring within the sector. It could prove strategic for bullish traders to remain on the sidelines until bullish patterns start to emerge on the charts. (For more, see: 5 Homebuilder Stocks To Watch)