Home construction is extremely sensitive to interest rates.

The sector has really been feeling the pinch with runaway inflation causing five rate hikes already this year.

However, it’s not just higher mortgage rates where consumers feel the pain… Higher living costs mean many would-be home builders had to put their plans on ice.

The iShares U.S. Home Construction ETF (ITB) shows just how much the sector has suffered. From its January high to its June low, ITB dropped a massive 42%.

After rallying off those lows, ITB is now under immense pressure again.

So today, we’ll see how things play out from here…

A Clear Bear Pattern

On the chart below, the 50-day moving average (MA – blue line) shows ITB’s clear downward trend.

It started when the 10-day MA (red line) bearishly crossed below the 50-day MA in January. The Relative Strength Index (RSI) also shows a clear bear pattern.

Take a look at the ITB chart…

iShares U.S. Home Construction ETF (ITB)

Source: eSignal

After falling from overbought territory (upper grey dashed line) down through support at the start of 2022, the RSI mainly remained in the lower half of its band (below the green line) throughout the downtrend.

Then, the RSI formed a ‘V’ out of oversold territory (lower grey dashed line) in mid-June. Soon after, ITB found a base (horizontal red line).

As the RSI trended higher – breaking back into the upper half of its range – ITB rallied strongly.

In just two months, ITB gained just over 30%. However, this time ITB ran into another common pattern…

The stock price began making higher highs (upper orange line) while the RSI made lower highs (lower orange line). This warned that a change of direction was in the cards.

And as you can see, that’s exactly how it played out…

iShares U.S. Home Construction ETF (ITB)

Source: eSignal

Eventually, lower buying momentum pulled the stock price lower.

From there, ITB continued to fall further off the back of two key technical signals…

1. The RSI fell through support and began tracking in the lower half of its range.

2. The 10-day MA again broke below the 50-day MA.

But after forming a ‘V’ near oversold territory in late September, ITB was again showing promising signs of an emerging rally.

This move in the RSI coincided with a higher low than from the June low – another positive signal. And in the last few days, the RSI has tentatively broken through resistance.

Yet with the market still looking fickle, what can we expect from here?

A Fickle Market

The action around the RSI will be key…

If the RSI can gain traction in the upper half of its range, then ITB’s rally could continue. The next test would then be for the 10-day MA to break back above the 50-day MA.

However, the market is still looking vulnerable…

If the RSI’s recent move turns out to be a false breakout – and the RSI reverses back into its lower range – then that’ll put a lid on any rally.

Instead, the RSI falling back below support would likely see ITB retest its June lows.

Any decisive move below that support level could then be the start of another leg down.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

Reader Mailbag

In today’s mailbag, a reader shares his thoughts on the current state of the housing market…

Thank you for your email. It’s possible that rising interest rates in the housing market will remain strong because building materials are excessively high. New builds have slowed, keeping existing prices high. New housing will be excessively higher.

– Charles M.

Thank you as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at feedback@opportunistictrader.com.