The Bid In The Bubble

08/31/05 03:21:30 PM

by David Penn

Housing bubble or no, an oversold market with plenty of short interest is one that is likely to bounce.

Security: $HGX
Position: N/A

Remember Marvin the Martian? The interplanetary adversary of popular cartoon character Bugs Bunny whose plans to destroy the Earth (which was blocking his view of Venus, if I recall correctly) were unparalleled in their futility? "Where is the boom?" Marvin would shout incredulously, as yet another doomsday plan* was foiled by the ever-resourceful rabbit. "Where is the Earth-shattering ka-boom?"

Those looking to wreak similar havoc on housing stocks may find themselves asking Marvin's classic question as well. After topping out July, the Philadelphia Housing Sector Index, or $HGX, seems to have found at least temporary support at a level halfway between where its rally began in May and where housing bears hope it ended in July.

Figure 1: The August correction in housing stocks took about 50% of the rally that began in the spring.

Graphic provided by: Prophet Financial, Inc.

When traders and technicians think about Fibonacci retracements, the tendency is to think of the more exotic Fibonacci levels such as 61.8% and 38.2%. But one of the most frequently visited retracement levels doesn't even require awareness of "Fib ratios" at all. That retracement level is simply 50%. It is also exactly where the correction in housing stocks, as measured by the $HGX, appears to have established a short- to intermediate-term bottom.

This bottom is suggested by a number of factors. The Japanese candlestick patterns late in August show a predominance of lower shadows as opposed to upper shadows. This means that during those days, buyers of housing stocks were willing to bid shares higher after intraday declines. Whether because of bargain hunting or short-covering, demand for housing stocks in late August, session after session, was enough to keep prices from closing at or near the low of the day.

There is also an intramonth positive stochastic divergence in August that suggested a bounce at a minimum. To be accurate, it was actually a running or multiple positive stochastic divergence as a trio of higher lows in the 7,10 stochastic (August 10, 23, and 30) were matched by a trio of lower lows in the price action of the housing sector index. Whether a trader attempted to buy the bottom after the first positive divergence (August 10 and 23) or the more recent one on August 30, it was clear that housing stocks were done going down for now. Bubble-shattering ka-boom averted--at least for now, puny Earth rabbit!

*Sorry, but I can't resist a bit of Dennis Miller-esque memory hole spelunking. Does anybody remember the name of Marvin the Martian's Earth-destroying weapon of mass destruction? How about the "Illudium Q-36 Explosive Space Modulator"!

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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Comments

Date:�08/31/05Rank:�3Comment:�

Date:�09/06/05Rank:�5Comment:�Good article. Did you attend the Science Fiction Fantasy Convention this past weekend? The Seattle members of that organization will probably know the answers to your question.

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