The iShares U.S. Home Construction ETF (ITB) topped out in July after rallying 80% from its October 2022 lows.

ITB is an ETF that invests in U.S. homebuilders and home improvement retailers such as DR Horton (DHI) and Lowe’s (LOW). Post-rally, it flatlined before reversing and heading lower.

We recently checked in on ITB in September (red arrow in the chart below). At that time, we saw that its steady decline had come off the back of sinking momentum.

But last week, that all changed…

News emerged that the Fed might be softening its stance on future rate rises. And ITB snapped higher.

So let’s check out ITB’s prospects from here…

A Chart of Two Trends

The 50-day moving average (MA, blue line) shows ITB’s two distinct trends.

First, a strong rally drove ITB up to its July peak, but it then rolled and trended lower.

iShares U.S. Home Construction ETF (ITB)

Source: e-Signal

ITB’s nearly 10-month rally coincided with two common bullish signals:

1. The relative strength index (RSI) tracked in the upper half of its range and showed sustained buying momentum.

2. Apart from a brief dip in March, the 10-day MA (red line) tracked above the 50-day MA. Both MAs moved higher.

The unusual thing about this rally is that it happened when interest rates were accelerating. That’s something you would normally expect to put a lid on demand.

But ITB’s run eventually ended, as it couldn’t break up through resistance (upper orange line).

During this period, momentum fell steadily from overbought territory (lower orange line).

And that’s what pulled ITB down.

ITB’s downtrend began to develop with a reversal of the bullish signals we saw during its rally.

First, the RSI fell through support (green line) and bearishly tracked in the bottom half of its range.

Second, the 10-day MA crossed below the 50-day MA. And both MAs dipped lower.

Take another look:

iShares U.S. Home Construction ETF (ITB)

Source: e-Signal

Up until the Fed’s meeting last week, it was hard to imagine what might break ITB out of its growing downtrend.

Yet the Fed’s subtle change of heart caused ITB to jump and saw it recently trade just above its 50-day MA.

Adding to the bullish sentiment, the RSI also recently jumped back into the upper half of its range (orange circle).

So what should we look for next?

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A Sustainable Rally

It is difficult to maintain an initial trajectory when a stock, like ITB, breaks higher.

For the rally to develop further, it needs a sustained uptick in momentum.

And that’s why I’ll be watching the RSI.

For ITB’s initial jump to evolve into a sustainable rally, we’ll need to see the RSI gain a firm footing in its upper band.

The other thing to watch is the MAs.

As you can see, ITB has recently traded right on the 50-day MA.

For ITB’s bounce to turn into something bigger, the 10-day MA needs to cross above the 50-day MA and start accelerating higher again.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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