If you have been a regular reader of mine, then you know by now most assuredly that one concept I often talk about is the idea of a prior resistance level turning into current support, and vice versa. Looking across a variety of time frames to identify these important price zones is crucial to gaining the correct perspective for your shorter term directional bets.
The weekly chart of the homebuilders is a pretty good example of a certain price area that has acted as both important resistance and support at various times over the past few years. On the $XHB, the $14 zone provided very strong support, as the buyers aggressively stepped in during the summer of 2008 selloff. After that, the buyers tried to defend the $14 level in the October 2008 crash, only to see it give way in the post-election day swoon. For the next several quarters, $14 was a brick wall of resistance, where bulls scurried away and bears came growling back in to short the homies into the mud.
It was only in the late summer of 2009 that $14 was finally recaptured again by the bulls. For the next several quarters, the homies based out just above the big 1-4, before (briefly) breaking out this past spring. Ever since late April, however, the bears have been back in the driver’s seat, and we now find ourselves at $14, yet again.
Now, even if you are longer term bearish on the homebuilders and housing in general, I believe it would be incorrect to not cover any short positions right here, right now. The probability of a bounce from this key level is very high, and I would suspect the savvier bears who shorted the homies in late April are taking some near term profits here.
Price has memory, and the $14 level is sure to be a tough battleground, yet again, with some of the late to the party bears on the cusp of being trapped. This is a heavily shorted sector, and some of the short squeezes here will be violent. If the broad market can follow through from last week’s hammers…buckle up.
(WARNING–Rated R)[youtube:http://www.youtube.com/watch?v=2hvNi0VZwc8 450 300] Twitter