The Dow Report: Housing: A Follow-Up On What the Charts Say
By Tim W Wood CPA, May 19, 2006
In the October 28, 2005 Observation, we looked at a few charts on housing. At that time the charts were telling us that a slowdown was in the making, but the severity of that slowdown was still unconfirmed. That confirmation is now beginning to clarify itself in the charts and for that reason I would like to review a couple of charts and the progression that has carried us to this point.
Last October when we first looked at this sector I reported that between late 2004 and mid 2005 housing prices, in many cases, doubled along the Alabama Gulf Coast. The boom was in high gear during this time frame, which is exactly what the charts were saying. But, by the fall of 2005, things began to change. Housing prices began to soften along the Gulf Coast and the condo sales simply stopped. A realtor recently told me that in the greater Pensacola, FL area there are now some 6,000 homes on the market.
In the February 24, 2006 Observation we followed up on these charts and I gave important cyclical support and resistance levels to watch. Today, I want to follow up on those support and resistance levels and see what the charts are saying now.
Below is a chart of the Dow Jones Home Construction Index. I have again 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. Note that each one of these intermediate-term lows occurred at a higher level than the preceding low. As a result, each of the intermediate-term highs that followed also occurred at a higher level as well. In the February 24, 2006 Observation I said that we had what appeared to be a failed rally because the advance into the January 2006 high, marked in blue, had not bettered the July 2005 high, marked in green. I went on to say that if the July 2005 high was not bettered that we would indeed have a failed intermediate-term cycle advance. I further stated that we should then look for the October 2005 low to be tested and the likelihood would then be for the April 2005 low to be violated. As you can see on the chart below, this has now occurred.
The time target for the 2006 intermediate-term cycle low has been the May/June timeframe. We are now obviously there and we should now expect this intermediate-term low in the not too distant future. But, the fact that this index has now broken below its previous intermediate-term cycle low means that the longer-term trend should have also topped in July 2005. Therefore, the expectation is that the rally out of the coming intermediate-term low should be a failed intermediate-term advance. This means that the coming advance is not expected to better the 2005 highs. If this proves to be the case, then we will not only have a lower intermediate-term low in place, but also the first intermediate-term failed advance in place. This would then serve as cyclical confirmation that the longer-term trend in housing has in fact turned.
So, the bottom line with this chart is that the intermediate-term down turn has indeed been confirmed. In the process, the first indications that the longer-term trend has turned are also now in place. Now, we should be watching for the intermediate-term low and the weight of the housing market lies on that advance. Unless it can better the 2005 highs, then lower prices are expected once the intermediate-term advance turns back down.
Next, we have the Philadelphia Housing Index. It too has made a series of higher highs and higher lows out of the 2002 low. The intermediate-term cycle lows are again marked with a blue "I". This index peaked in August 2005, which is marked in green. After an initial leg down, this index also peaked in January 2006 completing what appears to be a failed intermediate-term advance. So far, this index has held above it previous intermediate-term low as is marked in red. Therefore, this index is not as weak as the Dow Jones Home Construction Index above. At this time, the Philadelphia Housing Index has not confirmed the downside break seen by the Dow Jones Home Construction Index. The key here is the April 2005 intermediate-term low at 226.38. Watch that level because if it is broken it will serve as additional confirmation that the housing boom might have just gone bust.
Next, I have plotted a weekly chart of the Dow Jones Home Construction Index along with my Cycle Turn Indicator plotted in purple and my Trend Indicator plotted in green. When the Trend Indicator is moving up, we know that the intermediate-term trend is bullish and vise versa. When the Cycle Turn Indicator turns down and the Trend Indicator remains bullish, we know that the weakness is simply a buying opportunity. An example of this can be seen in mid 2003 and in early 2005. The down turns into the intermediate-term lows generally will turn both indicators down confirming the top. Note that the latest joint downturn occurred in conjunction with the July 2005 high. When the rally into January failed to actually turn the Trend Indicator back above its trigger line, the downturn that followed by both indicators served as further confirmation that there was more weakness to be expected into the intermediate-term lows due in early summer. At present, both of these indicators remain bearish. From a cyclical timing perspective, we are looking for lows in early summer. Knowing this, the shorter-term daily chart and indicators will become key. These shorter-term charts will be used to better zero in on the actual low. Then, when these weekly indicators turn positive, we will have our final confirmation of the intermediate-term low.
The long-term Dow theory and cycle quantifications provide us with our expectations and longer-term forecast. But, the Cycle Turn Indicator is by far the single most important short and intermediate-term tool I've found. When it's positive, so is the underlying market and when it turns negative we know that the intermediate-term trend has changed.
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Tim W. Wood
© 2006 Tim Wood