The Dow Report: A Brief Look at the Housing Sector
By Tim W Wood CPA, March 11, 2005
Today we are going to look at a couple of different indexes related to Housing. To begin with, I have a weekly chart of the Dow Jones Home Construction Index. This index includes constructors of residential homes, including manufacturers of mobile and prefabricated homes intended for use in one place.
The first indicator in the upper window is the stochastic oscillator. When this indicator is below its lower boundary line it tells us that the underlying index is oversold. When these oversold conditions form a weekly swing low and the stochastic turns up it generally marks a turning point and higher prices are seen. By contrast, when this indicator is above its upper boundary line it is telling us that the underlying index is overbought. When this overbought condition occurs and price forms a swing high accompanied by a down turn in the stochastic, lower prices can be expected. We now have a downturn of the stochastic oscillator, but we have not formed a swing high in price. Given the current price structure, a swing high will form next week IF price holds above this week's high AND if this week's low is violated.
The indicator in the next window is the momentum indicator. This indicator will often form divergences at market tops and bottoms. This in turn is used to warn that the prevailing trend is beginning to lose its head of steam and is thereby at risk of seeing a turn.
Understand that neither of these indicators are meant to be timing tools. They serve as warnings that must be used with other tools. Just as the stochastic can stay overbought or oversold, the momentum divergences can also grow and linger. The thing to watch for now is the formation of a weekly swing high as described above. When this occurs we should see a correction of at least intermediate degree. I will keep you updated on the formation of the swing high in future wrap ups.
The next chart below is a daily chart of the Dow Jones Home Construction Index. When we look at this index at this level it allows us to see price deterioration that could have longer term implications. For example, notice the upward trend line from the October price low has now been violated. You can also see on this shorter term chart that each one of the price advances since the October low has been followed with higher highs and higher lows. Once this pattern is violated and a lower low is formed, we will then have a breakdown in the short-term price structure that will open the door for the intermediate term decline to begin.
So, to summarize the picture here, we have the intermediate term trend that is positive, but overbought and due for a turn. But, until we see a weekly swing high form, the trend remains positive. When we look at the daily chart we are beginning to see some shorter term negativity. The rising trend line from October has been violated. If this is followed by a break below the February low then we should have short-term confirmation of a top of a least intermediate degree. Once this intermediate term decline begins we will then have to monitor it for signs of continued weakness or a possible reversal.
The next chart below is a weekly chart of the Dow Jones REIT Index. As you can see, this index made its most recent high in December. From that high a break into the February intermediate term low occurred. Since that low, this index has been in an intermediate term advance. The question now becomes, can this advance better the December high? If not, then the technical evidence will be in favor of a more meaningful decline. Violation of the February low will confirm that something of a higher degree is unfolding. We will further examine this possibility at a later date.
Now let's talk about the indicators. The stochastic oscillator is plotted in the upper indicator window and it has turned down. This is telling us that the intermediate term advance out of the February low has topped. But, the one missing ingredient is the formation of a weekly swing high. This will occur next week if this week's high is not exceeded AND this week's low is violated. If this occurs then look for the February lows to be tested and quite possibly violated.
The next indicator I want to talk about is my Trend Indicator. When this indicator turns up it confirms that the intermediate term trend is moving up. When it turns down it confirms that the intermediate term trend is moving down. As you can see, this indicator turned down at the December top and has not turned back up to confirm the bounce out of the February low. This is telling us that this bounce is a counter trend move. As long as this indicator remains in a down trend, any advance should be limited. But, if this indicator should turn back up, then this index will be set for another new high.
The summarized picture of this index is that it is at risk of having seen a major top. The next level of confirmation of that top will come with a violation of the February low. In order for the risk of this top to be nullified we will have to see the Trend Indicator turn positive AND a move above the December high. Any price action between the December high and the February low is of limited forecasting value. We have to see this index break out of this very important range.
Tim W. Wood
© 2005 Tim Wood