The Rally That Wasn’t Supposed to Happen

While investors have been caught up in the AI boom this year, another sector has also been quietly rallying…

The iShares U.S. Home Construction ETF (ITB) has risen 48% since the start of the year. And it’s up 79% since its rally started back in October.

That’s a huge move for an ETF that mostly invests in homebuilders and building products – especially when interest rates have been rapidly rising. Yet the low supply of homes in the U.S. has provided builders motivation to increase construction despite higher rates.

But when we last checked in on ITB (red arrow in the chart below), there were warning signs that its rally could soon reverse.

ITB has recently retraced around 10% off those highs. So today I want to see what’s on the horizon…

Clear Uptrend

On the chart of ITB below, you can see its clear uptrend since October last year.

That rally started with the Relative Strength Index (RSI) rising from oversold territory (lower red line):

iShares U.S. Home Construction ETF (ITB)

Source: eSignal

When buying momentum is steadily rising like this, that can help a falling stock find a base. That’s what happened here with ITB (upper red line).

ITB began to rally as the RSI broke up through resistance (green line) and into the upper half of its range.

As you can see, that is where the RSI remained for most of ITB’s nine-month rally.

And ITB’s rally was confirmed with the 10-day moving average (MA, red line) crossing above the 50-day MA (blue line) with both then tracking higher.

Apart from when the 10-day MA fell briefly (and only slightly) below the 50-day MA in March, the 10-day MA has bullishly tracked above it.

However, after peaking at its all-time high in July, ITB started to lose momentum.

When we looked at it on July 24, it was showing a classic reversal pattern.

As ITB was rallying and making new higher highs (upper orange line), the RSI was heading lower (lower orange line).

Take another look:

iShares U.S. Home Construction ETF (ITB)

Source: eSignal

This fall in momentum ultimately pulled ITB lower.

That action now has ITB facing two bearish signals…

1. The RSI has continued to fall and broke below support earlier this month.

2. The 10-day MA has rolled over and looks to be on the verge of crossing below the 50-day MA. If that crossover plays out, it will essentially be the first time that the 10-day MA has traded beneath the 50-day MA since early November.

So what do we need to look for from here?

Holding Short-Term Support

You can see on the chart (red circle) that the RSI is trying to set up a short-term base within the lower half of its band.

For the moment, this action in the RSI has helped stem ITB’s fall.

If the RSI can hold this level and begin to track higher, ITB may build short-term support followed by a potential move higher.

But it hinges on the RSI…

If the RSI continues to fall, that will also drag ITB lower. The 10-day MA crossing and accelerating below the 50-day MA would add further weight to any emerging down move.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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