Was That A False Breakout in Homebuilders?

The dreaded “False Move” appears to be at the top of the homebuilders chart. This is no bueno for casa makers. We talk about this false move phenomenon over and over again on the site because it occurs so often. For you newer readers, the idea is that, from false moves come fast moves in the opposite direction. In this case, we’re talking about the November 1st false breakout above key resistance that could not hold for more than a week.

Now that prices are back below the “breakout” level, we can question the validity of that breakout in the S&P Homebuilder Index ETF ($XHB). Phil Pearlman and I discussed this space during a live Google Hangout that we did for Reuters at the end of September. At the time, I figured this trade had already come and gone, and that it was time to look elsewhere. Now, I think looking at this space on the short side is actually the better idea.

Look at momentum rolling over. We can’t just ignore this bearish divergence going on in the homebuilders. With new highs in price at the beginning of November, the Relative Strength Index (RSI) was already putting in Lower highs. In fact, RSI did not even get any overbought readings this time around. That’s scary.

All in all, I would be very careful here on the long side for homebuilders. I would not be shocked to see a retest of that 200-day moving average below 22. And remember, we’re in a reversion beyond the mean business. So don’t be surprised to see an overshoot past the smoothing mechanism.

From a risk management standpoint, we would have to reevaluate our bearish position on any closes back above that former resistance – $26.30 or so. But from here, not a bad risk/reward on the short side. And take a look at the individual names. We’re seeing some similar misbehavior there too.