After a Massive Burst, This Sector Is Bleeding Momentum

The iShares U.S. Home Construction ETF (ITB) invests in our nation’s biggest homebuilders and building suppliers. Yet after a promising start to 2023, the ETF peaked and rolled over in August.

From there, it drifted lower as buying momentum steadily declined.

ITB languished for several months. Then the “Fed-pivot” rally pulled ITB upward. In just seven weeks, it gained an impressive 44%.

That surge topped out in December. And ITB’s profile changed dramatically as it got stuck in a tight sideways trend.

Now momentum is steadily falling. So let’s check what’s in store from here…

Double Divergence

In the chart below, you can see ITB’s steady climb through July.

That move saw the 50-day Moving Average (MA, blue line) trend higher. The shorter-term 10-day MA (red line) bullishly tracked above it.

And throughout that rally, our momentum indicator, the Relative Strength Index (RSI), stayed in the upper half of its range (above the green line):

iShares U.S. Home Construction ETF (ITB)

Source: eSignal

Yet that move petered out. The stock price and RSI began to show a diverging pattern (left orange lines).

While ITB was tracking sideways and unable to make new highs (left upper orange line), the RSI was steadily falling (left lower orange line).

The RSI slid past support and into the lower half of its range. That showed buyer momentum was waning. And it pulled ITB into a correction.

The 10-day MA crossed beneath the 50-day MA as well. And both then slipped lower. That added more confirmation to the down move.

Finally, ITB bottomed out in late October.

Then the RSI rallied sharply off the oversold line (lower grey dashed line). Along with that jump, ITB rose once more.

ITB continued to rally as the RSI burst through resistance (green line) and back into the upper half of its range.

Take another look:

iShares U.S. Home Construction ETF (ITB)

Source: eSignal

You can gauge the strength of that rally by how sharply the 10-day MA crossed back and accelerated above the 50-day MA.

But after hitting fresh all-time highs, ITB then topped out in December.

Just like the short-term peak in August, ITB struggled to make new highs and drifted sideways (right upper orange line).

And again, this coincided with the RSI reversing from overbought territory (right lower orange line).

That move now has the two MAs closing in on each other right as the RSI retests support.

So what am I looking for around here?

A Hard Level to Hold

The most immediate thing I’ll be watching over the coming week is the action of the RSI around support.

If the RSI falls through support and into the bottom half of its range (like back in August), then it will become increasingly difficult for ITB to hold the $100 level.

Any sustained decline in momentum will ultimately drag ITB lower. And it will help provide the setup for a potential short trade.

The other thing I’ll be watching is the action of our two MAs.

If the 10-day crosses beneath the 50-day MA and both fall (again like August), that will add further weight to any emerging down move.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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