The Dow Report: Housing, Has It Topped?
By Tim W Wood CPA, October 28, 2005
Whether we are in the markets or not, we all generally have an interest in the housing market as it touches us all. I know that on the Alabama Gulf Coast, the prices of single family homes have, in many cases, doubled within the last year. But, things seem to be slowing down a bit now. I'm hearing from some of the realtors that the market is not growing at the same rate in which it was. This could simply be a slow down or it could be a more meaningful top. Today, we will take a simplistic look at important support and resistance levels on a couple of housing related indexes.
In doing so we will begin with the Housing Index. I have marked the last three intermediate term cycle lows with a blue "I." The first one you see on this chart occurred in March 2003, the second one occurred in May 2004, and the last one occurred April 2005. Notice that each one of these intermediate term cycle lows occurred at a higher level than the preceding low.
Now let's move on to the current intermediate term cycle low that began in April and recently topped in late July. Since the July top this index declined into a late August short term low. This index then rallied briefly creating a short-term top in early September. This top failed to move above the previous high. This failure marked the first sign of short-term trouble and is marked in blue. From the short-term failed September top, the market moved lower violating the late August low. This is marked in green. Then, from that low the Housing Index moved up again and this time it failed to move above the September high. As a result of that failure, the September low was violated. So, what we have is a clear pattern of confirmed lower lows and lower highs on a short-term basis. When I say short term, what I'm really referring to is the fact that these lower lows and lower highs are occurring within the shorter term cyclical movement of the intermediate term cycle.
Having said that, we know that the intermediate term cycle topped in July and is now obviously headed down. But, the question now becomes, will the coming intermediate term cycle low be able to hold above the previous intermediate term cycle low? If so, then the cyclical structure at that level will still be bullish. But, if the April 2005 low is violated as this index pushes lower into the coming intermediate term low, then we will have a cyclical failure similar to the short term failure shown by the blue and green lines, but at a higher level. Again, each of the intermediate term lows shown above have occurred at higher levels and violation of the April low would therefore be cyclically significant. Such a break would be a major indication that housing has topped.
In the next chart below we have the Dow Jones Home Construction Index. Without going through all the details, you can see that it too looks pretty much like the Housing Index chart above.
Lastly, we have the Dow Jones Home Furnishings Index. In the September 30th Observation, we looked at the Dow Jones Home Furnishings Index and showed that the 2005 recent support level, or intermediate term cycle low, had been breached. I also showed that the 2004 low was the next important support level. I said that �this index is clearly showing us that the consumer is pulling in his horns and if the 2004 lows are breached, it will mean that further tightening should be expected.� As you can see in the chart below, the 2004 intermediate term lows have now also been violated. Sure, this index is oversold and could bounce, but this violation has much longer-term implications for this index.
I also want to point out that the Dow Jones Home Furnishings Index topped in March 2004 where as the other two charts above topped more recently. The Dow Jones Home Furnishings Index is definitely leading the way for the housing sector and based on this we should expect to see the previous intermediate term cycle lows violated by both the Housing Index and the Dow Jones Home Construction Index and if so, then yes, housing is at risk of a significant top. But, if these levels hold, then the longer-term structure of the housing sector will remain bullish and new highs will again be possible as the bubble stretches even more. Therefore, the decline into the coming intermediate term low is a very important test for this sector.
The October issue of Cycles News & Views is a beefy 25 page issue. In this issue I give specific timing windows for price, price targets, trend expectations, and more. This issue covers the stock market, gold, the dollar and bonds. Given the current state of the markets, you should have the technical data provided in this issue. For more information please visit www.cyclesman.com
Tim W. Wood
© 2005 Tim Wood