Trade The End To The Housing Recovery

traderchild

Junior member
15 1
Today, I'm looking at once heavily favored home builder ETF, $XHB. A few months back (during the height of QE3), this basket of housing stocks was the darling of many a trend-trader.

Alas, speculation points to a possible near-term end to quantitative easing. As such, the 10-Year Treasury yield is shooting to the moon and rising rates have taken the bite out of home builders’ recovery.

Here’s the chart:
Stock Quote XHB

Even the briefest of glances at $XHB shows a stark reconfiguration from its previous steady uptrend. The ETF enjoyed an ascending channel that seemed to track the S&P rather closely. However, fundamental headwinds have a knack for reversing even the strongest of trends…

Price action has been forming a big-picture “head and shoulders” pattern. This is a definite bearish formation, and those with experience trading the pattern should recognize that price now has the potential to plunge quite precipitously.

We do have a strong support level at the $28 mark. It wouldn’t be inconceivable for this backstop to hold for a bit before momentum intensifies. Should price break below this point, I’d anticipate selling volume to increase significantly as buyers exit their positions en masse.

As far as setups are concerned, I’m looking for an increase in volume as the $28 support line is broken, coupled with a bearish bar fully realized below the support level. Should a confluence of these events occur, we’d be looking at a definite go-ahead on a bearish trend and a clear descending channel.

Just as I liked $XHB on its path to nearly $33, I like it as a textbook reversal. Though I’m not ready to open up a short position yet, there are a number of obvious factors making the case for a high-probability setup. Watch this trade closely.

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Traderchild
 
 
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