We'll be the first to admit that we are bearish on the housing market; and we are bullish on 10-year not yields that will ultimately have a negative impact upon mortgage rates and hence home sales. However, our fundamental backdrop really doesn't square well with our technical viewpoint on the Housing Index ($HGX). The question therefore is whether the liquidity driven rally of the past 9-months will reappear in $HGX. The probabilities favor it doing so just ever so slightly in our opinion.
The weekly $HGX chart now shows a series of rising highs and lows of the March-09 bottom, and indeed prices did breakout above near-term resistance in the 80-to-90 range in bullish fashion. Moreover, prices have built upon this by holding above the breakout level, and have further broken out above the 50-wee exponential moving average and trendline resistance. In other words; 3 very important resistance levels have been taken out. Now, prices are consolidating in bullish fashion as the 14-week stochastic is moving lower - which in our experience means that more often not - prices are going higher. Our initial target would be the previous highs at 120; and then higher into overhead resistance at 150-to-155...where the 200-week moving average crosses at the present time.
We find this rather difficult to reconcile commonsensically, and indeed the potential breakout remains just that - a possibility rather than anything hard. But it certainly bears watching, for we will be leverage to be had here if the funds sense a newly minted trend higher given the still large outstanding short position. We're skeptical; but open to the potential of our skepticism being completely wrong.
Good luck and good trading,
Richard
