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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… |
With a reported 1.6 million homes on its books yet to be completed – and a load of debt approaching its deadline – Evergrande is back in the news.
And, it’s fair to say the Chinese property group is hanging on by its fingernails.
It shows just how quickly things have unravelled…
Back in May, Evergrande’s bonds were tracking along as usual. However, today those same bonds are trading for between 20 to 30 cents on the dollar.
As each of these debts approaches its due date, you can be sure there will be plenty of headlines about the company and its high-profile founder…
For me, though, when it comes to analyzing the global property sector, I’m going to keep looking beyond Evergrande and the news cycle.
Instead, I’m going to watch a broad-based ETF and let the chart do the talking…
Today we’re going to look at the SPDR Dow Jones Global Real Estate ETF (RWO).
As you can see in the chart below, RWO has been in an uptrend from the start of the year… right through to its all-time high (A) on September 3 ($55.30).
That peak coincided with the Relative Strength Index (RSI) giving an overbought signal.
SPDR Dow Jones Global Real Estate ETF (RWO)
Source: eSignal
For the entire move up, the short-term 10-day moving average (MA – red line) stayed above the long-term 50-day MA (blue line). The moving averages didn’t cross back the other way until after RWO rolled over from its peak.
When we looked at RWO on September 28 (red arrow), Evergrande had been a big story for about two weeks…
However, back then, the selloff in RWO commenced well before the Evergrande story broke.
At the time of writing, I was keeping a particularly close eye on the RSI. The RSI was on the verge of going into oversold territory and I was looking for it to form a ‘V’…
Failure to do so would’ve likely meant RWO had further to fall.
Since then, the RSI did form a ‘V’ before RWO went on to rally…
This action is a great reminder to base your trades off the chart… and not what’s in the news. Had you gone short in RWO off the back of the Evergrande story, you would’ve entered just before it bounced.
More recently, after making its low (B), RWO has been rallying higher, with the 10-day MA once again crossing back above the 50-day MA…
However, this rally has been showing less intensity over the past couple of weeks.
So, what am I looking for next?
The next test for RWO is to see if it can break above its all-time high (A). If it does so – without the RSI forming an inverted ‘V’ – then the long-term uptrend will remain intact.
And that could provide an opportunity to go long…
However, all things again hinge on the RSI. It’s once again closing in on a key level – the upper grey horizontal line.
SPDR Dow Jones Global Real Estate ETF (RWO)
Source: eSignal
What happens here will ultimately determine RWO’s direction over the coming weeks.
If RWO’s rally fizzles before it reaches (A), and the RSI forms an inverse ‘V’, then we can expect to see a wave of selling…
And that could provide the opportunity to capture a short move.
When the RSI went from overbought to oversold through September and into October, the RWO share price fell by almost 10%.
For now, we’ll watch and see…
And that means switching off the news in the meantime… and letting the chart tell us when to place our next trade.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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