One of the star performers in the market this year has been the iShares U.S. Home Construction ETF (ITB).

ITB is an exchange-traded fund (ETF) that invests in major U.S. homebuilders like D.R. Horton and Lennar. It also has smaller holdings in home improvement retailers such as Lowes and Home Depot.

ITB’s peak in late July represented a near 80% rally from its October 2022 lows. That’s a huge gain for a sector that’s sensitive to rising interest rates.

But when we checked in on ITB last month (red arrow in the chart below), it had dropped 10%. And buying momentum had steadily fallen.

Then its attempted rally earlier this month failed to gain traction. So today I want to see what’s in store from here…

Momentum Is Steadily Falling

The chart of ITB below shows where its rally started last October.

After bottoming out, the long-term 50-day Moving Average (MA, blue line) steadily climbed. Then it started to flatten out at the beginning of this month.

iShares U.S. Home Construction ETF (ITB)

Source: eSignal

Throughout ITB’s uptrend, you’ll also notice two other bullish signals…

1. Apart from a brief period in March, the 10-day MA (red line) crossed and tracked above the 50-day MA.

2. The Relative Strength Index (RSI), a momentum indicator, also tracked mainly in the upper half of its range (above the green line).

Both of these patterns are common when a stock is in an uptrend.

After reaching a new high in July, though, ITB’s rally started to run into resistance (upper orange line).

Despite trying multiple times to break above $90, each move fizzled out.

This is a classic sign that buyers are exhausted.

A look at the RSI in the bottom half of the chart shows us why ITB couldn’t move any higher and eventually fell.

To sustain a rally, you need positive buying momentum. New buyers need to come in and push the stock to fresh highs.

However, if that momentum steadily fades – as we saw here (lower orange line) – then that stock will eventually fall.

When we checked in on ITB back on August 24 (red arrow), the RSI had dropped through support and was tracking in its lower band.

Take another look:

iShares U.S. Home Construction ETF (ITB)

Source: eSignal

We noted that the RSI needed to hold its level and start tracking higher for ITB’s rally to resume.

But after briefly piercing resistance – which led ITB to a lower high – the RSI has again drifted lower.

So what am I looking for from here?

Continuing to Drift

One of the main characteristics of an uptrend is a series of higher lows and higher highs — just like ITB did throughout its rally.

Well, the opposite also applies.

ITB made a lower high on September 1. So the next move for ITB will be key for where it heads from here.

And again, a big part of that lies with momentum.

If the RSI is unable to break higher and remains stuck in its lower band instead, ITB will struggle to hold its current level.

And it will continue to drift lower.

We’d then look for the 10-day MA to accelerate below the 50-day MA as confirmation of a bigger move down.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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Dear Larry, I would like to inform you that I have closed the trade that I bought for $5.05 for $7.10 on 15 September for a gain of 40%… Thank you, Larry, for the opportunity to make money. Warm regards,

– Rabiah H.

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