No bottom in sight for housing

Well, it seems like the news on housing just keeps getting better. Yesterday the Mortgage Bankers Association (MBA) reported that the number of mortgage applications for home purchases had dropped to its lowest level in 14 years last week. Application volume for mortgages fell a seasonally adjusted 3.1% for the week ending July 9, compared with the week before, pushing volume to its lowest level since December 1996 according to the MBA. Now, I’m not sure what all that means for the future of housing, but it sure doesn’t sound good!

According to the MBA’s weekly survey, applications for mortgage refinancing fell a non-seasonally adjusted 2.9% for the week ending July 9, compared with the week before. Also, refinance applications were almost 79% of all applications. The MBA survey covers about half of all U.S. retail residential mortgage applications and has been conducted since 1990.

I can think of one possible reason for the plunge in purchase applications: The disappearance of the home-buyer tax credit? It’s quite plausible that the tax credit pulled a lot of sales from future months into the recent past, thus we’re losing would-be home sales now.

Another note of interest: The home-buyer tax credit expired at the end of April, right when the stock market started it’s current sell off. Coincidence?

Below is a chart of the XHB that I posted last month when new and existing home sales dropped to record lows. The XHB is the SPDR Homebuilders ETF. This ETF is a way for investors to invest in the housing sector, somewhat similar to a mutual fund. Specifically, this ETF is a collective investment in industries, such as homebuilding, building products, home furnishings, home furnishing retail and home improvement retail. This ETF is also a great way to gauge the market’s “thoughts” on the housing market. As you can see, the market seemed to have been already anticipating the wonderful housing news we’ve been getting as of late.

XHB – 1 YR (As of June)

Now, take a look at an updated view of the XHB:

XHB – 1 YR

I made notation of when I showed the first chart and my belief that there was a short opportunity on this ETF, or on individual home building/retail stocks. Well, doesn’t it appear that there might be another chance to enter a short position now? On the other hand, what would it tell you if the XHB breaks through the down trending resistance line (red) that I have shown on both charts?

The Tale of the Tape: The XHB had broken down from its up trending support (blue) back in the beginning of June, which pointed toward lower prices. That has in fact happened. Now, the XHB has a strong down resistance line (red), which it is presently sitting at. As with the last time the XHB hit that resistance, the highest probability trade at this time would be to short either the XHB or individual homebuilder stocks such as TOL, LEN, KBH or others. You could also look to short housing retailers such as TSCO. If you decide to short the XHB itself for a more conservative trade, you would want to set a stop above that resistance line. If instead the XHB were to break above that resistance, you could then start looking for long positions in the same stocks or the XHB!

Waiting for the most opportune times that I have outlined above could provide you with the highest probability trading points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!
Christian Tharp, CMT

Back to the bull, or still a bear?

A couple of weeks ago I wrote a newsletter making the case for the start of the renewed bear market. Take a look at the chart below and I think you will get the point of that newsletter. You will notice an important notation in red, which is a key break of support.

S&P 500 – 1 YR

The break of that support, combined with all of the headlines and the obvious lower-lows & lower-highs of the past 3 months seemed to paint a clear picture. But as you may already know, the market is very seldom “clear”.

Flash forward to now, and as of today, the market has completed a 6-day rally culminating in an 8% gain for the S&P. So, the question on a lot of investors’ minds is: Is the worst over or is there more to come?

Although only history will answer that question, a lot of times we can get a sense of what may be to come by analyzing the chart the market itself. Please take a look at the chart of the S&P I have shown below. You will notice that I’ve added the 50-day SMA (simple moving average), a 200-day SMA and the support level from the chart I have shown above.

S&P – 2 YR (3/2007 – 3/2009)

For anyone who is not familiar with a SMA, it is simply a line that plots the average price of a security for the last 50 days. As the current daily price is added to the average, the 51st day past is dropped. So, as the price of a security drops or rises, the SMA will rise or fall accordingly. The same process can be applied to the 200 day time period, as I have done above. As you can see, the shorter time period of the SMA, the quicker the average adjusts. Moving averages can help to smooth out a trend, but they can also commonly be used as trading “signals”.

A very common long term trading signal is when the 50-day SMA crosses above or below the 200 day SMA. When it crosses above, it can tend to be a good indicator of an upturn in the markets and vice versa for when the 50-day crosses below the 200 day SMA. You will obviously notice in the chart above that the 50-day SMA had recently crossed BELOW the 200-day SMA, signaling a potential change in trend. Of course, that expected change in trend would be from up to down. For an example of the last occurrence of a 50/200 “crossover” (or “cross-under” depending on your terminology) for the S&P, please look at the chart below:

S&P – 2 YR

You will notice that the last time we had a 50/200 crossover on the S&P was at the beginning of our current rally. The 50-day SMA crossed back ABOVE the 200 day SMA signaling the trend was changing. If you look at the next chart, you will see the previous time in which the 50-day SMA crossed BELOW the 200-day SMA:

S&P – 5 YR – 2004 to 2008

The last time the 50-day SMA crossed below the 200-day SMA, well, we all know how that turned out. However, there may be a glimmer of hope to this current downtrend. In the above chart I have outlined (2) “fake-outs” that occurred during that bull market. In both of those instances, the 50-day SMA did cross under the 200-day SMA briefly, but quickly rose back above it within a couple of weeks. If you are looking for a confirmation of a renewed uptrend, the 50-day SMA would need to get back above the 200-day soon. If we continue to fall lower, the any idea of a fake-out could be extinguished. Want to see the previous (2) 50/200 crossovers and how they turned out?

S&P – 5 YR – 1999 to 2004

As you can see, the last (2) 50/200 crossovers were also very reliable signals of trend change in the market. The 50/200 crossover in 2003 started one of the longest bull markets in history and the one in late 2000 was the start of the preceding bear market.

The previous (2) charts also show another common occurrence, which is that it is not uncommon for the 200-day SMA to act as either support or resistance for the 50-day SMA. Just something to keep in mind for future reference when using these particular moving averages.

So, the markets are rallying higher and if they can continue their run, could this recent 50/200 crossover just be another “fake-out”? Well, there’s one little hurdle standing in the way. If you look at the next chart, you will see that there is significant resistance standing in the market’s way:

S&P –

Just like the moving averages can act as support or resistance for each other, they can also act as support or resistance for the market itself. You can see how either the 50-day or 200-day SMA has acted a resistance for the S&P for the last 2 months and before that they tended to act as support for the market. Now that we are approaching BOTH the 50-day and the 200-day SMA, will this stop the market in its tracks?

The Tale of the Tape: The S&P is fast approaching both the 50 and the 200-day SMA. Both of these averages can be expected to act as resistance for the S&P. The 50-day SMA has crossed below the 200-day SMA, which tends to signal a downtrend in the overall market. Unless the S&P can manage to break above both averages, and quickly bring the 50-day SMA back above the 200-day SMA in the process, the trend should remain down for quite some time. If this ends up being the case, the highest probability trades will be on the short side. Just remember, the trend is your friend.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!
Christian Tharp, CMT

Market Watch?

With the increase in market volatility over the last couple of months, it can become confusing to know how to successfully navigate a profitable trading strategy. Stocks you may be following seem to be jumping higher very quickly and just as quickly drop all of the sudden. One of the first steps I recommend before entering any trading position is to analyze the market itself for the best potential entry points. I might look at the Dow, the Nasdaq, or my personal favorite, the S&P. By analyzing the S&P I can look and find the most opportune points at which to enter my trading positions.

If you notice the chart I have highlighted below, you will see it is the current 1 yr. chart of the S&P 500. I have added 2 details to this chart that I find of most interest at this time. The red line is the 200-day moving average (MA) of the S&P 500. The second is a simply line of support that has been created by this index.

S&P 500 -1YR



First, take a look at the MA. You will notice that the 200-day MA has been acting as a resistance for the S&P over the last several weeks. The 200-day MA can tend to be an important level for the S&P, as you see back in June and July of last year when it acted as support. The next thing I would like you to notice is the black support line I have added to the chart. The S&P has been “bouncing” on this support level since February. These (2) price areas can be very useful in constructing a trading plan.

So, how might one trade this market based on the information we see above? Here are some of the questions I’d be asking:

1)   “Can we hold the 200-day MA?” Today we are currently holding this level, and if I believe it will continue to do so, this might be an excellent opportunity to enter a long position.

2)   What if the move above the 200-day MA is just a fake-out (as with the support tests back in June/July) and we break back below that MA? If that were to happen, I would expect the S&P to fall back down to the support line. So, if we cannot hold the 200-day MA, wouldn’t that be a great opportunity to enter a short position?

3)   If we fall down to the support line, wouldn’t this be a possible chance to enter long positions in which to expect another bounce higher?

4)   Lastly, what if we fall down to the support line and do not hold it? I would expect more selling, thus giving me another excellent short opportunity.

The range between the 200-day MA and the support line is a very tight range. With the recent volatility in the market, it can be a very challenging process to try to trade within this range. Waiting for the most opportune times that I have outlined above could provide you with the highest probability trading points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!

Christian Tharp, CMT

RIMM – Earnings good, but good enough?

Shares of the Research in Motion (RIMM) fell about 4% in after-hours trading today upon the release of the company’s latest earnings report. Although RIMM is still growing nicely, the latest results could renew the worries in regards to the increased competition from the likes of Apple’s iPhone and devices based on Google’s Android software. The company also announced it will buy back up to 31 million shares over the next 12 months.

In the three months ending May 29, RIMM had shipped 11.2 million BlackBerrys and gained 4.9 million new subscribers. Analysts were expecting shipments closer to 11.5 million and at least 5 million new subscribers. The company also stated that profit rose to $768.9 million, or $1.38 a share, from $643.0 million, or $1.12 a share, in the year-ago period. Revenue climbed 24% to $4.24 billion in the three months ending May 29. Analysts had expected RIMM to earn $1.35 a share on revenue of $4.35 billion. In their conference call, executives said revenue was lighter than expected because RIMM had sold more of their lower-priced BlackBerrys. In the second quarter RIMM predicts earnings of $1.33 to $1.40 a share and revenue coming in between $4.4 billion to $4.6 billion. Wall Street was forecasting a smaller profit of $1.32 a share on revenue of $4.52 billion.

Although the earnings were good, they seemed to have missed Wall Street’s expectations. What does this mean for the stock? What is the trade? Let’s review the chart of RIMM, which I have shown below.

RIMM – 1YR

First, notice the up trending support line that I have denoted in blue on the chart. You can see that in the beginning of May RIMM broke that support. So, is it possible that investors had already been anticipating a slow down in earnings growth for RIMM? Remember, the markets do tend to be forward looking. Based on the recent 3 month downtrend in RIMM’s stock, and the break of the up trending support in May, it appears that today’s disappointing earnings release was somewhat expected. Also, what if you had been following RIMM’s stock back in the beginning of May? Entering a short position upon the break of the up trending support level would have been a very successful trade.

Flash forward to the stock’s current position. With today’s release, RIMM will most likely be on the move. I have highlighted two key areas to watch in the near term. A key level of support will be the area at $55, which I have shown in red. A break below this level would probably signal an increase in selling pressure and lower prices ahead. However, if the stock were to instead break higher through the $63 resistance level (green), I would expect higher prices in the future.

The Tale of the Tape: RIMM’s earnings release will most likely set the stock moving in a new direction out of its current range between $55 and $63. Those will be the two key price levels to pay attention to. A break above $63 would be an ideal time to enter a long position with a stop below the $63 level. On the other hand, what if the stock were to instead break below its key $55 support?  Instead, entering a short position with a stop above the $55 level would provide an excellent trading opportunity.

The markets are entering another earnings season. It will be important as a trader to pay attention to key breakout points for your stocks. Stocks will most likely break into new ranges upon the release of their company’s earning report. Identifying the most opportune times to enter trades, such as I have outlined above with RIMM, should provide you with much higher probability entry points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!

Christian Tharp, CMT

The housing slump continues

A double dip in housing? Well, it’s starting to appear so. Two housing reports released this week seem to paint a gloomy picture for the housing market. As reported on Tuesday, existing home sales fell 2.2% to a much lower-than-expected annual sales rate of 5.66 million. To make things worse, yesterday’s new home sales report fell 32.7 % to an adjusted annual rate of 300,000. For the housing optimists, the scary part about the latter report was that it hit an all-time low. Although the decline in May was anticipated (thanks to the tax credit that expired in April), most analysts did not expect a drop of this proportion. It would appear that many banks are starting to place more foreclosed properties on to the market, possibly causing more downside pressure to an already weak housing market.  Even though analysts had been expecting better of these two reports, is it possible that the markets were not?

Below is a 1 Yr. chart of the XHB, which is the SPDR Homebuilders ETF. This ETF is a way for investors to invest in the housing sector, somewhat similar to a mutual fund. Specifically, this ETF is a collective investment in industries, such as homebuilding, building products, home furnishings, home furnishing retail and home improvement retail. This ETF is also a great way to gauge the market’s “thoughts” on the housing market. In other words, if the market was expecting housing o improve, wouldn’t the XHB reflect that expectation with a trend toward higher prices? Please take a minute to analyze the chart with the notes I have made.

XHB – 1YR

The first thing you might notice is the trend lower over the last two months. Always remember that the markets tend to be forward looking. If money managers and advisors believe that  the housing market is going to turn back down in the future, are they going to wait until it actually happens to position themselves? Of course not. Think of it this way: When you’re driving down the road in your car, do you wait until it’s pitch black outside to turn your hedalights on or do you turn them on before it gets dark? So, it would appear that the XHB has been reflecting the belief in a downturn in housing, thus the recent downtrend.  The market simly believed that there was a problem in housing before the actual numbers got worse.

Now, were there other signs of potential problems ahead? Notice the break of the uptrending support line (blue) in June. The break of that 7 month trendline was pointing to probable lower numbers in housing and in turn lower prices ahead for the XHB. Lastly, the XHB has also been respecting a clear downtrending resistance (red) since it’s recent high of $20. By the same token that the break of the recent support line might foretell lower prices, might a break up through the current resistance point to higher prices for the XHB and an possible upturn in the housing market?

So, how might one make trades based on the information we see above? Here are some of the questions I’d be asking:

1)   Is it best to be short XHB or individual homebuilders?

2)   When might it be time to look to enter long positions?

The Tale of the Tape: The XHB has broken down, which points to lower prices. The highest probability trades would be short in either the XHB or individual homebuilder stocks such as TOL, LEN, KBH or others. You could also look to short housing retailers such as TSCO. If you look to short the XHB for a more conservative trade, the best entry for that trade might be on a retest of the down trending resistance (red) with a stop above that line.  If we break above that resistance, you could then start looking for long positions in the same stocks!

Waiting for the most opportune times that I have outlined above could provide you with the highest probability trading points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!

Christian Tharp, CMT