Housing prices across the nation reach new records every day. As soon as a “for sale” sign appears on a front lawn, a “SOLD” sign is stuck over the top of it.

Record low rates and huge buyer (and investor) demand have caused housing prices to soar.

With prices growing around 20% in the past year alone, the 65% of Americans who own (or are paying off) their own home will likely be patting themselves on the back.

However, while these record prices might grab all the headlines, the truth is, people’s homes only represent one part of the property market.

There are numerous other parts to the property market that are equally important.

One ETF I trade that covers the full array of property is the iShares U.S. Real Estate ETF (IYR). Because of its diversity, IYR simply allows me to trade property as a single asset class.

IYR enjoyed a strong rally this year.

Apart from a brief crossover in January, the 10-day moving average (MA – the red line) remained above the 50-day MA (blue line) right through September.

iShares U.S. Real Estate ETF (IYR)

Source: e-Signal

With the Relative Strength Index (RSI) showing IYR to be overbought, IYR peaked on September 3 (A) and retraced lower from there.

When I wrote about IYR in late September (red arrow), it was right at the crossroads. At that time, the 10-day MA was just in the process of crossing down over the 50-day MA.

Since then, IYR bottomed out on October 6 (B), along with two key signals from the RSI.

First, the RSI formed a ‘V’, just prior to IYR forming the low. The second signal was divergence between the RSI and IYR’s share price (green lines).

The RSI started to show an increase in buying momentum while the fall in IYR fizzled out. (Remember that divergence between the share price and the RSI can often lead to a change in direction.)

The other thing you’ll notice on the chart is that the 10-day MA crossed back above the 50-day MA on October 21, providing a bullish signal.

However, there are two things telling me that this current uptrend has lost momentum…

The peak of the recent uptrend (C) is at a lower level than that in September (A). For the uptrend to have remained intact, ‘C’ would need to be higher than ‘A’.

The other thing I’m watching is the RSI at the bottom of the chart…

iShares U.S. Real Estate ETF (IYR)

Source: e-Signal

The RSI shows that momentum peaked along with the October high (C), and has been trending lower since.

For the current pullback to gain traction from here, the 10-day MA will need to cross back down over the 50-day MA.

If that were to happen, then that low in October (B) comes back into play.

If IYR trades down to ‘B’ and finds support around the October low, that tells me that IYR could be transitioning from an uptrend to a rangebound market.

And that could provide plenty of mean reversion trades.

However, failure to hold that level – meaning that IYR breaks below ‘B’ – means that IYR will likely be forming a new downtrend.

Either way, we’ll find out over the next couple of weeks.

For now, the focus remains on the current action. If the current down move matches the 10% fall from ‘A’ to ‘B’ in September (through to October), that could provide a very quick and profitable short trade.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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