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Will Housing Stocks Continue to Drop?


Looking at the charts, it's hard to stay bullish.

I noted two weeks ago that the overall sentiment on housing had gone from extreme doom and gloom to outright optimistic recently. What makes that dangerous is that the recent price action in housing stocks has been very weak. In other words, there are a lot of knife catchers out there. If things bottom at despair, we simply aren't seeing that in housing stocks here.

Getting right to it, the iShares US Home Construction ETF (NYSEARCA:ITB) has completed a very bearish looking head-and-shoulders pattern. In fact, it found resistance right near the neckline and formed a doji. There is not much to get excited about here if you are bullish.

How much further this group can drop is anyone's guess, but the path of least resistance is clearly lower until that neckline is broken. On August 6, I noted three concerns for the bulls. Now, add the action in housing stocks as another worry.

Lastly, ITB recently dropped 20%. This is now officially in "bear market" territory. That is all fine and dandy, but does it matter? It looks like more losses could be in the cards, based on history. There have been three others times it dropped 20% (ITB just started trading in 2006). One month and three months later, it was lower every single time. Going out more it bounces, but near-term concerns are warranted.

Overall, there are still many warnings out there that make being extremely bullish tough. It appears some more weakness or at least consolidation is in the cards.

This article by Ryan Detrick, CMT, was originally published on Schaeffer's Investment Research.

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