Over the last few weeks, many technical analysts were calling for a breakout in the homebuilders stocks, particularly the iShares U.S. Home Construction etf the ITB as a pure-play on the sector (50% of the etf’s weight is in the top five holdings, DHI, LEN, PHM, TOL & NVR).
As regular readers know I consider technical analysis as one input to help inform a broader theme, usually aiding in the choice of strikes for options structures, but also very helpful with entry and exits near support and resistance. Like most, I think few technical formations are as powerful as a breakout on volume after a long base. But last week’s price action in the ITB had a little something for both bull and the bear. Those calling for the breakout of the one year range got it early in the week as investors expected increasingly dovish commentary from the minutes of the Fed’s December meeting:
The epic breakout on volume seemed to be a foregone conclusion but then the sector got hit with some bad fundamental news from some components showing weak margins on recent quarterly sales. Which brings me to another fairly important (in my mind at least) technical pattern, the failed breakout on volume. The ITB’s inability to hold the breakout and actually make an intra-day reversal on the breakout day is VERY bearish. The prior breakout level should serve as staunch technical resistance as opposed to what would have been support if it were able to hold the breakout.
Taking a look at a slightly longer time frame one can see that the base that the sector had been in had been fairly tight, between the low to mid $20s for almost two years:
The breakout was building for years, not months.
So what to do now? The ITB is likely a buy again in the low $20s on continued weakness and probably a sale closer to the failed breakout level closer to $27. At $25, the etf seems to be in a bit of no mans land, but it will likely remain one of the most rate sensitive sectors as investors continue to debate the Fed’s next move.
In the interim the sector could continue to see some sideways action, and the recent spike in implied vol (the price of options) could set up nicely for short premium range trades or yield enhancement for existing longs: