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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. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones. 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… |
There’s no doubt that the markets are having everything thrown at them right now…
From war headlines to inflation and rising interest rates.
The impact of the Ukraine invasion has seen commodities like gold, oil, and wheat rally strongly (Ukraine is a massive wheat exporter, with around 95% shipped via the Black Sea).
In addition, widespread inflation will soon bring rising interest rates… The first rate rise is due in about two weeks.
This is all adding to the uncertainty and confusion that many investors are feeling…
It’s not just about which stocks they should invest in, but how they should allocate their investments.
That’s why today, I’m going to take a fresh look at one asset class that has just retested a key level – property.
When we last checked in on the iShares U.S. Real Estate ETF (IYR) it followed a similar path to the stock market (red arrow marked ‘A’).
Let’s take a look at the chart below…
iShares U.S. Real Estate ETF (IYR)
Source: eSignal
IYR peaked last year on December 31 and participated in widespread selling when stocks fell heavily in January.
That selloff saw the 10-day moving average (MA – red line) cross down over the 50-day MA (blue line), which is a bearish signal.
That fall coincided with the Relative Strength Index (RSI – lower section on the chart) going from overbought (upper grey horizontal line) into oversold territory (below the lower grey line). With the RSI forming a ‘V,’ IYR bounced off support at the orange line.
However, that bounce proved to be short lived…
Last month, I wrote that for the bounce in IYR to gain traction, it needed to break above its resistance at the 50% level (green line).
If the RSI rallied up to the green line but rebounded lower, then we could expect the bounce to run out of steam.
And that’s exactly what happened…
While the RSI ran up to its resistance twice, it failed both times to break higher (1 and 2).
The RSI is stuck in the lower half of its channel below the green line (a bearish pattern). IYR drifted lower to once again re-test support…
But the day before the invasion, IYR broke down through support.
Although IYR opened lower on February 24 (the day of the invasion), it closed out the day right on support and rallied higher the next day.
Since property is an important asset class, what can we expect from here?
Well, the action around IYR’s support level is key.
So, let’s take another look at the chart…
iShares U.S. Real Estate ETF (IYR)
Source: eSignal
For IYR’s rally to continue, it must hold support. From there, its next test is to break back above its February 2 high of around $108.
Any move higher would depend on the 10-day MA crossing back above the 50-day MA.
What happens around the RSI is just as important as the support level…
Having bounced out of oversold territory, the RSI will soon re-test its resistance level (3). If the RSI can break above the green line and hold, then the rally in IYR has a higher probability of gaining momentum.
However, we can expect more selling if the RSI hits resistance and rebounds lower (just as it did at 1 and 2). And that would push IYR back below support and down to fresh lows.
With the Ukraine situation still unfolding, we can expect plenty of volatility in the days and weeks ahead.
Just remember to base any trade off of key technical indicators instead of the news flow.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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