Last year’s rapidly rising interest rates led many to put their dream of a new home on hold…

Even for those willing to commit to a new build, supply chain disruptions coupled with a shortage in skilled labor – saw blowouts in time and building costs.

Against this backdrop, the iShares U.S. Home Construction ETF (ITB) dropped over 40% from its January 2022 high to its June low.

But after hitting that low, ITB’s fortunes started to turn…

ITB rallied into August before reversing and consolidating at a higher low in October. From there, ITB rallied through the end of 2022 into the start of 2023.

However, that rally reversed sharply at the start of this month. Now ITB is about to retest a key level, so today we’ll check out what’s in store from here…

A Chart of Three Parts

On the chart below, the 50-day moving average (MA – blue line) shows three distinct sections in ITB’s long-term trend.

First, we see a downtrend (‘1’) at the start of 2022, followed by a consolidation phase mid-year at ‘2.’

On October 11 (red arrow), ITB was nearing the end of this consolidation phase. That’s when ITB’s uptrend began in November (‘3’)…

iShares U.S. Home Construction ETF (ITB)

Source: eSignal

Within this broader trend, there are a few regular patterns…

For example, during the downtrend at ‘1,’ the 10-day MA (red line) stayed mostly below the 50-day MA.

And throughout this period, the Relative Strength Index (RSI) bearishly remained in the bottom half of its range (below the green line).

But during ITB’s uptrend in section ‘3,’ the opposite occurred… The 10-day MA remained above the 50-day. And the RSI mainly tracked in the upper half of its band.

But today, I want to concentrate on the action around the peak of this rally.

Take a fresh look…

iShares U.S. Home Construction ETF (ITB)

Source: eSignal

In early February, the RSI formed an inverse ‘V’ in overbought territory (upper grey dashed line). This peak and reversal coincided with ITB’s peak on February 2 ($73.90) at ‘A.’

After the RSI continued to track lower, ITB lost around 10% of its value before establishing a short-term base (orange line) last week.

However, with the RSI recently breaking below support (red circle) and tracking closely to the green line, this support level is looking vulnerable right now.

So, what can we expect from here?

Short-Term Support Is Key

For ITB to resume its October rally, the RSI must break back into the upper half of its range – and remain there. The longer it stays in this upper range, then the longer ITB’s rally could be.

We also need to see the 10-day MA rise higher above the 50-day MA as further evidence of a re-emerging uptrend.

However, the immediate action around the RSI will be key.

If the RSI instead tracks lower and gets stuck in its lower band, then ITB will be unable to hold short-term support.

And if the 10-day MA crosses below the 50-day MA, then that would add further bearish sentiment. This would indicate ITB’s current pullback has room to run.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

Reader Mailbag

In today’s mailbag, a One Ticker Trader member thanks Larry for his guidance…

Hi Mr. Benedict, I just wanted to thank you for reaching out. As someone new to trading (with a very modest account), it meant a lot that you took the time to reach out to us and explain the reasoning behind your recommendations.

I’m looking forward to receiving your next trade alerts. Here’s to a prosperous year.

– Joseph C.

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