The Ascending Wedge and the Homebuilders

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The FED’s no taper “surprise” has provided another opportunity for the housing trade thesis to revive itself. Immediately after the announcement last Wednesday, housing stocks saw sharp and fast move higher. However, the market did not allow the sector to rip higher for the remainder of the week. To be honest, I thought that the move would instantly produce a drift higher. I took to the charts and noticed a subtle technical chart pattern occurring in the near term. The pattern is know as the “Ascending Broadening Wedge.” Click here for the information page on Bulkowski’s chart pattern site.

Below are the charts (60 day, 2 hour candles) for both the iShares U.S. Home Construction ETF (ITB) and the SPDR Homebuilders ETF (XHB).

Screen shot 2013-09-22 at 1.45.17 AM Screen shot 2013-09-22 at 1.45.02 AM

 

The ascending broadening wedge is characterized by a series of higher highs and higher lows. These types of patterns can be difficult to trade due to the fact that they can serve as bullish and bearish triggers. While the longer term broadening wedges are indicative of a topping process, shorter term wedges are typically a continuation pattern. According to Bulkowski’s website, the continuation win percentage is an impressive 76%. My argument in this case is that the current wedge forming is a bullish continuation pattern.

A typical pattern will sport three touches to the bottom trendline before a fast break higher that pierces the upper trendline. This is what is known as the breakout point. Prices can then fall to establish what is known as a “partial decline” and this is quickly bought up prior to another touch on the bottom trendline. Currently, prices in the above ETFs are participating in this very partial decline. Monday and Tuesday will be highly important in terms of the pattern resolving itself either higher or lower.

Sorry for keeping this post brief. I did not want to use too many words to describe the above charts. It makes a lot of sense when you line those charts up with the Bulkowski article examples. Please leave comments as any discussion is welcome!

PS: To the guys in 12631. I have exited the trading room for now because I have to tend to both classes and internships. I will be back in soon (probably like a month or so) when the dust settles. I learned a lot trading in there over the summer with both Chess and RC. The methodical approach that Chess takes to trading is elemental to both portfolio success and risk management. Even if you are not following his exact positions, noting his levels of cash and participation on the long or short side is extremely helpful and it prevents being caught out of position in a choppy market. Meanwhile, RC possesses a unique momentum approach to trading with the same risk management principles as Chess. His winners move fast and big, and he is able to spot what is working in the market with his legendary “Intraday Runners” screen.

Thanks again guys for making that room a place to learn and to make money each and every day. Also shout out to all the members that make that room great. You know who you are. I’ll be back in soon.

4 Responses to “The Ascending Wedge and the Homebuilders”

  1. Indeud, TPain. We’ll keep the lights on for you!

  2. Great post. Thank you, TPain. Best wishes and look forward to seeing you soon.

  3. What Dominator said — Indeud.

  4. TPain good luck with your academics. Looking forward to your return, you are a class act.

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