As the S&P 500 (CBO: SPX, Stock Forum) rallies from the shallow correction Autobottrading.com warned of on April 15, homebuilders are also trading higher, to levels where risk for investors is great. The Philadelphia Housing Sector Index (PHL: HGX, Stock Forum) has breached this year’s highs and is up, as of this writing on April 20t, over two percent. Despite the bullish price action, the sector is reaching very long term resistance levels which will likely halt and reverse the bullish advance which began last March. We advise investors, long term position traders, and swing traders to use this strength to exit positions in the housing sector.
The chart below is the weekly chart of ($HGX). The rectangular box represents multiple time frame resistance, a level where sellers are likely to gain control of the market. The box also represents an area where extreme optimism has entered this sector. There is no reason to be optimistic about the U.S housing market, and investors buying at these levels will likely feel the pain of a sharp reversal of the trend over the next several weeks.
The iShares US Home Construction ETF (NYSE: ITB, Stock Forum) has also reached levels where risk to investors is high. We believe a new high will soon be made in this ETF, and the breakout will very likely be false. We suggest selling (ITB) and associated equities as the ETF makes new highs over $14.35.
KBHomes (NYSE: KBH, Stock Forum) is likely to reach $18.05 prior to a significant reversal. Selling this stock into this level would be wise. We would expect that trade to $18.05 will result in a sharp move lower to $16.57 and possibly much lower.
Toll Brothers (NYSE: TOL, Stock Forum) is likely to reach $21.40 prior to a significant reversal. Selling this stock at this level would be wise. We expect trade to $21.45 will result in a sharp move to $19.92, but much lower prices are possible.
Ryland Homes (NYSE: RYL, Stock Forum) is the weakest of the group of builders. Signifigant resistance rests at $24.91, but we are concerned that prior to the expected homebuilding correction, Ryland could roll over prior to reaching its resistance zone. Autobottrading.com will focus on this equity for short sales if our software indicates the likelihood of high reward to risk opportunity.
In summary, we urge long term investors to exit long positions in the U.S housing markets into prevailing strength. Though we believe there will be breakouts in these Indexs, ETFs, and equities, they will likely be false, thereby trapping the break out players and retail investors. Rather than buy the breakout, sell it, and park the proceeds for better opportunities arising in the future.
Neither Autobottrading.com, nor the author currently holds positions in the housing sector.