Positive Divergence in Homebuilders Suggests More Upside for S&P 500

Home-builders served as the canary in the coal mine during the Q4 2018 market selloff. Now, after a 20% rally from the Christmas Eve lows, they are running into critical resistance. What happens here will have broader implications for the overall market.

The bearish price action of the Home-builders Sector ETF XHB over the past year is a textbook case of a technical downtrend. A series of lower highs and lower lows. Technically, XHB is a sell as long as it stays within the downward trend highlighted in the chart.

However, if we dig below the surface a bit, looking at the RSI momentum indicator, you will see a clear as day example of positive divergence. As the price of XHB was making lower lows, RSI was making higher lows.

Given this positive divergence, it is probable that XHB will soon break out of its 1 year downtrend, and that would signal further gains to be had in both XHB and the overall market.

As the S&P 500 approaches its 200 day moving average, and as XHB tests its downward channel resistance, what happens this week is critical for the markets going forward.


Popular Posts