Todays Big Stock: SPDR S&P Homebuilders ETF (NYSE: XHB)

In order for the economy to ever get going again, the American consumer is going to need to get back on its OWN two feet. Its bad enough to have to deal with issues such as high unemployment and rising gas prices, but the most difficult problem facing consumers may be the constant decline in housing values. Not only does the fall in housing create financial headwinds, but it also creates psychological barriers resulting in a lack of confidence for the future. So the question is this: Is the housing market bottoming, or getting worse? If I trust what the market is telling me, it’s probably getting worse.

The XHB (SPDR Homebuilders ETF) is an Exchange Traded Fund that seeks to replicate as closely as possible the performance of the S&P Homebuilders Select Industry Index (HSII). The HSII represents the homebuilding sub-industry portion of the S&P Total Markets Index. The XHB invests in industries, such as homebuilding, building products, home furnishings, home furnishing retail and home improvement retail. This ETF can be a great gauge into the market’s “view” of housing Please review the 1 yr. chart of XHB (SPDR Homebuilders ETF) below with my added notations:

Over the last 9 months, the XHB has created an important price level at $17 (green). You can see how as far back as November the price of $17 has not only been a primary area of support whenever it is approached, but it was also prior resistance. Last week the XHB broke this key area of support and it did so on a pick up in volume. Volume increases on breakouts or breakdowns add validity to the break. Apparently, the market is sending a message that not only is housing not recovering, but it also may be heading even lower.

The Tale of the Tape: The housing ETF, XHB, has broken its key level of $17. This should signal lower prices for the XHB and probably the housing/real estate industry in general. A short could be entered on the XHB with a stop above the $17 level. Also, traders might want to research homebuilding stocks for potential breakdowns there.

Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.

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. Capital preservation is always key!

Good luck!

Christian Tharp, CMT