בס״ד

Framing a Building Collapse (XHB)

Posted on April 22, 2021

Today’s trade is brought to you by the New World Order – the same slime that wants you to give up all that’s meaningful in this world, and … well, just trust them.

Alan B. Harvard will have more to say about the so-called New Age in a coming letter, but today we’ve got more pressing business.

Let the foundations shake!

Today’s trade is pinned on the SPDR S&P Homebuilder ETF (NYSE:XHB), an ETF that’s only marginally related to homebuilding per se, and more geared toward materials and furnishings offerings like Lowe’s, Home Depot, et al.

Either way, though, the homebuilder run has been perfectly Babellian, and we believe the biblical crash and burn that followed that tower’s construction is about to be repeated.

Why?

  • The intermediate trend of interest rates has flipped and is now heading higher.  That should cool the housing market somewhat.
  • And the transition out of Batflu buying mode should also weigh on XHB.
  • Moreover, we expect the current stimulus to do precious little to stem what we see as a coming retrenchment among consumers.
  • Wall Street will also add to the homebuilder misery by rotating out of an overbought sector into a new asset du jour.

Have a look at the WEEKLY chart for the last two years –

Technically, we have –

  1. A weekly RSI that approached the overbought 80 line before turning lower, and
  2. MACD just beginning its roll (both in green).
  3. All the while new highs were being etched (almost two months), volume has dropped off significantly (in black) – not in the least bullish, as it bespeaks a growing lack of commitment on the part of bulls with each passing week.
  4. As to price itself, we have a reverse head and shoulders (or cup and handle) pattern (in red) that has NOW COMPLETED ITS UPSIDE COUNT (in blue).
  5. According to a simple Fibonacci calculation (in purple), the initial decline could bring the shares to 55, and then, possibly, as low as the bunched moving averages at 44, where strong support resides.

And it’s for all the foregoing that we’re recommending the following –

A Jew and His Gold recommends you consider selling the XHB September 17th 80 CALL for $1.75 and buying the XHB September 17th 66 PUT for $1.85.  Total debit on the trade is $0.10.  Set a STOP buy on the shares at 80.

Rationale: with a decline in the offing, we see the structure of the trade offering our best opportunity to profit.

Spreads on the options are outstanding (tight), and that means any decline will pay off both quickly and handsomely.

Maximum gain is unlimited.

Maximum loss – with proper STOPs in place – is $0.10 (your initial debit).

Be sure to set a new STOP sell on the shares at 80 should the STOP buy be triggered.

Thereafter, reset the STOP buy at the same level (80), should the STOP sell be activated.  And so on.  The trade should always have an open STOP at 80 to keep the trade square.

Many happy returns,

Matt McAbby

 

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