Over the last two days, the daily scans for bullish charts are turning up homebuilder after homebuilder with names like Lennar (LEN), DR Horton (DHI), Taylor Morrison (TMHC), Standard Pacific (SPF) and Meritage (MTH) appearing at least once.
There's enough on this list where it makes sense to simply check out the ETF highly correlated with any of these names, the iShares Dow Jones U.S. Home Construction ETF (ITB). Despite the issues some ETFs have had trading today, it doesn't scare me away from using them and looks to be a simple, very short-term computer glitch. ITB did not fall into that group today, for what it is worth.
Now, before I go and get anyone bulled up on ITB, I should lead with the point that I think we are due for a small pullback here, but I think it will be a buyable pullback. On first glance, this chart looks like it has broken out higher already, with the close over $28 yesterday. And in fact, it has, so I could understand buying here and looking for a move to $29.50, but I think we see a better price yet, possibly something with a $27 handle.
I'm basing this on the Ease of Movement (EMV) indicator. This one can be a bit contrarian, since it seems as if a high EMV should mean moving higher will come easily. If you look at the times the EMV has been at or near 2 for ITB, you'll notice the ETF will often pull back, or at least consolidate when we are at these readings. Right now, we sit at the highest reading the ETF has seen since October. That tells me the longer-term trend is still higher, but waiting for a pullback into support offers. Those past pullbacks have coincided with the trendline, now at $25.50, but this has changed recently with the shorter-term ascending triangle. Support now sits at $27 and this looks to be the most efficient entry point, buying a bounce off the $27 area. I would like to see the RSI maintain the 50 level as well for that buy. Also, the slow stochastics bullish crossover in oversold territory is worth noting for future reference, but if the path I want to see play out does play out, we will not see those levels reached, and I'm all right with that.
The weekly view on ITB underscores the importance of the $27 level. We have a rising wedge formation, which, if lost, will become bearish and we can expect to fall back into a $25-$27 trading range with a possible low of $21 if the market ever decides to seriously correct.
While we have strong stochastics, MACD and RSI readings, meaning both trend and momentum are bullish, they are getting close to overheated with the stochastics already there. A move into oversold, then back below oversold, is often a yellow flag, so special attention needs to be paid to the slow stochastics at the moment. This one has a very long setting at %K34, %D13, so don't expect fast moves, but a pullback under $26 will likely trigger the flag.
Note this does come under the $27 price, so a move below $27 along with that stochastics trigger would be a hard stop for me regardless of any long-term fundamental view I may have here. We would be likely to see a MACD trigger of a bearish crossover as well, and it may happen before the stochastics given the shorter-term setup, but this has traditionally been a confirming-only indicator for ITB, not a leader.
Be patient with this one, but I think we'll get another opportunity to buy this one soon with the expectations a $27+ buy will turn into a $30-$32 ETF within six months.
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