Rising interest rates saw the iShares U.S. Home Construction ETF (ITB) lose 43% in just six months last year.
ITB finally went oversold around the middle of June. And it built a base and started turning things around.
It rallied – but reversed from its August peak, with a higher low in October.
After that, ITB steadily climbed.
It recently traded 7% above its late 2021 all-time high. But the chart now warns of a potential reversal.
So today I want to see what’s in store from here…
A Similar Reversal Pattern
ITB’s current leg of the uptrend started in October last year (‘A’). That move began with a common reversal pattern, as the left orange lines on the chart show.
Momentum steadily rose in the Relative Strength Index (RSI; see lower orange line). That broke ITB’s downtrend (upper orange line), causing it to reverse and turn higher.
iShares U.S. Home Construction ETF (ITB)
Source: e-Signal
ITB’s rally then developed in conjunction with two bullish signals:
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The RSI broke through resistance (green line). It gained a firm hold in the upper half of its range. As the chart shows, it has remained there throughout ITB’s rally.
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The 10-day Moving Average (MA, red line) broke above the longer-term 50-day MA (blue line). Both then continually tracked higher.
When we looked at ITB back in February (red arrow), though, that rally looked like it was in trouble…
ITB had reversed strongly from its February 2 peak at ‘B.’ And the RSI fell from overbought territory (upper grey dashed line) and then broke below support.
As the chart shows, though, the RSI’s down move petered out.
Instead, it tracked closely along the support/resistance line. And ITB traded in a tight sideways range.
Then the RSI regained traction in its upper band, so ITB’s rally resumed in April. This move higher coincided with the 10-day MA rising more strongly above the 50-day MA.
Take another look:
iShares U.S. Home Construction ETF (ITB)
Source: e-Signal
ITB rallied to new highs. But a reversal pattern similar to the one that started the October rally is starting to unfold.
This time, though, it’s a downtrend in the RSI (lower right orange line) that could pull ITB down from its steady run of higher highs (upper right orange line).
So what am I looking for around here?
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Vulnerable to a Pullback
Reversing from overbought territory, the RSI is now moving back toward support (red circle).
It broke briefly through the support level in late May and in February, but it didn’t gain any traction in its lower band then.
Instead, the RSI tracked along this level before breaking higher again in April, causing ITB to rally.
I’ll be watching the RSI closely to see if a similar pattern repeats.
But if the RSI breaks even lower and gains a firm footing in its lower band, then ITB could be vulnerable to a fresh pullback – especially as it’s up nearly 90% from its June lows just over a year ago.
Beyond that, we’ll look for the 10-day MA to cross below the 50-day MA.
That would be confirmation of the pullback – and could extend into a longer-term downtrend.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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