Prof. Sadana

People are saying that housing sector has bottomed. Do the charts confirm this?

Thanks,

Minyan Alice


Minyan Alice,

There’s certainly some positive sentiment brewing in the housing charts. Notice the 30% gain in the PHLX housing sector index since the middle of July.


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Also, some key housing stocks made higher lows while the housing index hit a new low in July. Check out homebuilding stocks such as NVR (NVR), MDC (MDC) and Toll Brothers (TOL). Here’s the Toll Brothers chart, which clearly shows that it made a distinct higher low.


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So that’s good news, and I would certainly keep housing stocks on my trading radar. I always like to follow the market leadership.


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For instance, I remember the way homebuilding stocks peaked in fall of 2005, while home prices were still ascending. That was the first warning sign the prescient market gave to all those who would listen! The first cracks were felt in the housing sector in summer 2006.

With this preamble, let’s talk about your question. Charts definitely show positive and encouraging action - but this could be similar to the bounce we encountered in the second half of 2006. We had a meteoric 25% rise in the index, only to falter and swoon to new lows.

While the recent price action is constructive, I would await further guidance from the evolving chart patterns in these stocks. I am looking for higher lows (and higher highs), a strong basing action or a successful retest of the old lows that we hit in July 2008.

Once we see evidence of continued accumulation in this consolidation action, we can feel more confident that the market expects the housing quagmire to start resolving itself next year. And don’t worry, when that happens, traders will have ample time to make money.

Till then, it would be prudent to treat this merely as a rally that needs to consolidate soon.

On a closing note, let me leave you with the following words of wisdom from Jesse Livermore, who’s considered the greatest trader ever: "It isn't as important to buy as cheap as possible as it is to buy at the right time."

Sincerely,
Smita