After peaking in late 2021, the iShares U.S. Real Estate ETF (IYR) lost 35% by October last year due to rapidly rising interest rates.

IYR invests primarily in commercial Real Estate Investment Trusts (REITs) – from communication towers and industrial property to data and self-storage centers.

But REITs can be sensitive to interest rates. Higher rates make it more expensive to borrow money – something real estate companies often use to operate.

So after rallying at the start of this year, IYR rolled over again. This time, it fell almost 20% in less than two months.

Since then, IYR has been struggling to find a direction. But it recently began looking oversold.

So today, I want to check its prospects for the rest of the year…

Another Reversal

The chart of IYR below shows where its downtrend finished in October last year.

Yet the Relative Strength Index (RSI) rallied from oversold territory (left orange line). And IYR was able to find a base and rise.

iShares U.S. Real Estate ETF (IYR)

Source: eSignal

Apart from a brief dip in December, that positive momentum carried IYR higher until it topped out on February 2 at ‘A.’

At the time, it looked as though IYR’s rally would continue.

However, the RSI made an inverse ‘V’ from overbought territory (upper grey dashed line). And IYR reversed.

That fall continued until a converging RSI pattern set IYR up for another reversal (red lines). This time, its March low at ‘B’ was higher.

But as the chart shows, after initially rallying, the RSI was unable to break into its upper band. Instead, it tracked right on top of support/resistance (green line).

This saw IYR trade in a particularly tight range.

That narrow sideways pattern is also visible in our two moving averages (MAs). When we last looked at IYR back on May 2 (red arrow), the 10-day MA and 50-day MA were starting to track closely together.

When the RSI gained traction in its upper band and the 10-day accelerated above the 50-day MA, IYR rallied to its recent July high.

Take another look:

iShares U.S. Real Estate ETF (IYR)

Source: eSignal

This time, it was a diverging pattern (right orange lines) that caused IYR to reverse. Note that both converging and diverging RSI patterns often lead to stock reversals.

IYR continued its fall along with two common bearish signals:

1. The 10-day MA fell back down below the 50-day MA.

2. The RSI fell through support and has been tracking in its lower band.

But the RSI is now in oversold territory (red circle). So what am I looking for around here?

Look for a Clear ‘V’

Just because a stock is oversold, there is no guarantee that it will rally.

We need to see the RSI make a definitive ‘V’ and track higher – just like when IYR rallied from its low in October last year.

If the RSI continues to track sideways along the oversold line (lower grey dashed line), then we can expect IYR’s fall to continue.

The next test for any emerging downtrend would be for IYR to take out its March low (‘B’) and then its October low.

The other thing to keep a close watch on is our two MAs.

When the 10-day MA is converging toward the longer-term 50-day MA, that could help provide the setup for a potential trade from either direction.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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