Breakout Above The Downtrend Line Bullish For The Home Construction ETF

sellbuyMorpheus Trading: Over the past few days, we have noticed a decline in the number of quality buy setups in our nightly stock scans, but this is to be expected when the broad market is extended in the short-term.

A few days of broad-based selling action to scare off some of the “late to the party Charlies” would be ideal, as it would absorb overhead supply that translates to technical price resistance. In turn, this could possibly present us with new, low-risk pullback buy entries.

Relative strength is an important tool we use every day when scanning for stocks and ETFs.

Pattern relative strength, in which we compare significant swing highs and lows of a stock or ETF against a broad market index like the S&P 500, is an easy way of identifying which stocks are strong and which are not.

A good example of this is the recent price action in iShares U.S. Home Construction ETF ($ITB), which just broke above its dominant downtrend line on the weekly chart below:

$ITB WEEKLY DOWNTREND LINE BREAKOUT

At first glance of the chart above, the breakout above the downtrend line looks bullish. However, when compared with the benchmark S&P 500 on the weekly chart below, the substantial relative weakness of $ITB becomes clearly apparent:

$ITB WEEKLY RELATIVE STRENGTH

While the S&P 500 SPDR ($SPY), a popular ETF proxy for the S&P 500, has been in a clear uptrend with a series of higher highs and higher lows, notice that $ITB has been trending lower, setting lower highs and lower lows.

This concept of relative strength trading, detailed Trading ETFs: Gaining An Edge With Technical Analysis, is a pretty simple concept, but highly effective. Stocks or ETFs that hold up better than the major indices during a broad correction are usually the first to break out when the market becomes healthy again.

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