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Larry’s note: Welcome to Trading with Larry Benedict, the brand new free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
Without a doubt, the biggest story over these past couple of weeks has been about Evergrande.
It’s been impossible to miss coverage on the collapsing Chinese real estate giant…
And with debts of over $400 billion – and its share price in free fall – it’s easy to see why.
But while Evergrande was blamed for the fall last Monday, worries about its solvency came to light at least a week prior to that.
Right now, I don’t think anybody knows exactly how the Evergrande story will play from here…
What it does do, though, is bring the global property sector into the picture. And it’s here that I think things could soon get interesting…
To keep track of the global real estate market, I use the SPDR Dow Jones Global Real Estate ETF (RWO).
Let’s check it out now…
RWO Price Chart
Source: eSignal
When we looked at RWO back in early August (the red arrow), it had been pushing right up against an important resistance level (the blue horizontal line).
So, in early August, RWO had just touched this same resistance level for a fourth time.
As the chart shows, RWO pushed briefly through this resistance before peaking on September 2. Since then, it’s been trending down.
That means RWO rolled over several weeks before most investors had ever heard of Evergrande.
The question now is, what next?
On the chart are two moving averages (MA). The red-dashed line is the short term 10-day MA. The blue-dashed line is the long term 50-day MA.
The 10-day MA crossed down through the 50-day MA last Monday (September 20) – which is a bearish signal.
However, the next test for RWO comes with the Relative Strength Indicator (RSI)…
So, let’s take a look at the lower half of the chart…
RWO Price Chart
When RWO peaked on September 2, it coincided with the RSI showing it to be overbought (the blue line crossing above the upper grey dotted line).
That led to a reversal in momentum (falling RSI), causing RWO’s share price to fall.
As you can see now, the RSI could soon test the lower grey dotted line (indicating RWO to be oversold).
So, the price action around that becomes key…
For RWO to rally from there, first we will need to see the RSI make a “V”. The next test after that is for the 10-day MA to cross back above the 50-day MA (a bullish signal).
However, if RWO goes into oversold territory and doesn’t bounce, that could mean further falls ahead.
After such a long run up over the past 18 months, RWO could be due for a decent pullback.
With a whole lot of debts due these next couple of weeks, you can be sure Evergrande will stay in the news. Because of that, there will be plenty of investors watching it like a hawk…
For me, though, I’ll be keeping a close watch on RWO.
As an ETF that represents the broad global real estate sector, it tells me far more about the health of property than any individual stock.
And with RWO about to test a key RSI level, it could provide plenty of trading opportunities ahead.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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