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The homebuilder group can be an important one to follow, as strength in homebuilders implies optimism for the economy based on consumers’ ability to buy new homes. People don’t buy new homes unless they can afford to do so, which means watching charts like the iShares US Home Construction ETF (ITB) can be a valuable gauge of consumer sentiment. Right now, it is flashing a warning sign. From the October 2023 low to the end of last year, the ITB soared higher, gaining over 40% in value in just two months. Interest rates moving lower certainly helped this upside momentum, with the 10-year Treasury yield dropping from 5.0% to 3.8% during this period. But with the 10-year back above 4%, are homebuilders experiencing that same bullish phase? Not really. Since mid-December, the ITB has been decidedly sideways, rangebound between $97 and $104 in the last month. During this stretch, the RSI has been sloping downwards, creating what is called a “bearish momentum divergence.” This is where price is moving higher, but the RSI is sloping down. This pattern often suggests an exhaustion point to the bullish trend, and increases the likelihood of a downside rotation. Earnings can often provide an upside catalyst for a group, as we’ve seen recently in sectors like technology and financials. Unfortunately, this week saw D.R. Horton, Inc. (DHI) disappoint on earnings. As the largest weight in the ITB, an earnings miss and subsequent price drop are managing to weigh down the entire group. ‘Line in the sand’ For ITB, we’re now observing a test of price support around $97, right at the low from earlier in January. This is the technical “line in the sand” based on my assessment, meaning a break below this level opens the door to a much deeper retracement from the Q4 rally. In terms of further downside support, I’m watching the 50-day moving average around $95.30 and the 38.2% Fibonacci retracement level around $92. If the broader market follows the traditional seasonal pattern of weakness in Q1, I could see the ITB moving even lower to test the 61.8% retracement around $84. This would be right around the 200-day moving average. ITB YTD mountain ITB, YTD Technical analysis pioneer Charles Dow taught us that an uptrend is a pattern of higher highs and higher lows. As long as this pattern continues, then an uptrend remains intact. If homebuilders break slightly lower than current levels, the recent uptrend would be considered broken, and astute investors should be considering downside risk for this key industry group. -David Keller https://www.marketmisbehavior.com DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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