The real estate sector took a major hit at the end of May and into June as mortgage rates increased along with home prices -- and the latter occurred even despite tight access to credit and limited inventory. Regional reports out of major metropolitan areas are showing home-price increases of 20% and upward from one year prior.
Here's a sampling of the most recent data:
In the metropolitan Denver area, sales were up 32% year over year in July, while the average home-sale price was up 9%.
In the Chicago area, sales were up 35.3% in July year over year.
In the Dallas/Fort Worth area, home sales increased 27%, while the median sale price jumped 12%.
Nevertheless, iShares Dow Jones U.S. Real Estate (IYR) has continued to struggle, having hit a May high of $76.21 before sharply falling to a low of $62.71 about a month later. The fund saw a partial recovery to $69.60 into mid-July -- but since then it, and related securities, have once again been falling.
Despite recent weakness, things are looking up. The real estate sector struck major support on the daily time frame and, once again, trend development and momentum are both favoring a recovery off these levels that will at least benefit short-term traders.
IYR and many related stocks have retraced to the key Fibonacci support level at 61.8% since they pivoted off the prior daily highs several weeks ago. The level also corresponds to prior price support on daily and weekly time frames. One example can be seen below, in the Essex Property Trust (ESS).
But the support alone is not enough to make any security worthwhile as a trading opportunity. Additional confirmation would come in the form of trend development, momentum and volume.
Let's start with volume. As this sector as pulled lower, volume has been decreasing overall, indicating a general lack of interest on the short side. Meanwhile, there have been two major downswings within the correction. These are easily discernible on the 90-minute time frame, although I've also marked them on the daily charts.
The momentum on these two downside moves, however, was stronger than average due to a shift in the upside momentum that took place into the prior highs, which slowed that rally and increased the risk of a stronger drop. But that same style of momentum shift has since taken place at the current support levels, strengthening the support and increasing the odds for a stronger price recovery off these levels, too.
We already saw the first wave of recovery begin Friday. This is now the time to monitor the intraday time frames, such as the 90-minute charts, for continuation strategies on the upside as this sector continues its second attempt at a recovery since its bottom six weeks ago. If the momentum from Friday holds, we could easily see June's highs broken with a 100% expansion of the rally that took place between June 24 and July 24. But, in the meantime, some initial resistance to watch for will be the intraday congestion from the afternoon of July 24 to July 30, and then the lows from the day prior to the start of the daily reversal on July 23.
Additional securities to monitor are the Ultra Real Estate ProShares (URE), which corresponds to roughly 2x the daily performance of the Dow Jones U.S. Real Estate Index; the Direxion Daily Real Estate Bull 3X (DRN); and even Avalonbay Communities (AVB).