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A Reversal In Housing Stocks

06/07/07 11:55:47 AM
by David Penn

The measured move in the housing index takes a hit as interest rates spike higher.

Security:   $HGX
Position:   N/A

Interest rates and inventories ... that is the fundamental story of the housing market in the United States.

Housing stocks, as measured by the Philadelphia Housing Sector Index ($HGX), bottomed in April just as long-term interest rates, as measured by the 10-year Treasury note yield index, made a short-term peak. But the resumption of the bull market in long-term rates in mid-May led to weakness in the housing stocks just as the group was moving above its April high.

A month ago, I wrote that a measured move pattern in the $HGX was likely to take housing stocks higher in the near term. I projected a target of about 248 and noted that "a strong move through the 235 level" would be necessary in order to power the index past those April highs. The actual April highs were at 237.

FIGURE 1: PHILADELPHIA HOUSING SECTOR INDEX, DAILY. A breakdown below the 10-, 20-, and 50-day exponential moving averages follows a negative divergence in both the MACD histogram and the stochastic.
Graphic provided by: Prophet Financial, Inc.
There was a close above 237 on May 22. However, follow-through to the upside was hard to come by. That May 22nd close was followed by two shooting star sessions — shooting stars being a candlestick pattern that warns of waning momentum. The market continued to move sideway into June. But while the market was above the April highs, both the moving average convergence/divergence (MACD) histogram and the stochastic remained below their respective April highs (Figure 1). This divergence between the higher highs in $HGX and the lower highs in both the MACD histogram and the stochastic only added to the warning that the current uptrend in $HGX was under pressure.

That pressure became overwhelming on June 6, as $HGX broke down not only below its uptrend line, but also below the 50-day exponential moving average. So far, this has led only to more selling, as the $HGX is now testing the May lows for support. If support is not found here and the $HGX continues to move lower, the next source of support will be the year-to-date lows made in April at the 213 level.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine,, and Advantage.

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