The bears came out on top on Tuesday as intensifying worries over possible U.S. military involvement in Syria coupled with Fed taper fears opened up the doors for profit taking. Major equity indexes sank into red territory even amid upbeat economic data; August’s consumer confidence reading came in at 81.5, inching right past last month’s figure of 80.1 [see The Complete Visual History Of SPY].
Our chart to watch for today is the State Street SPDR Homebuilders ETF (XHB, A+), which will look to rebound off a key support level as investors digest the latest pending home sales data from July.
Consider XHB’s one-year daily performance chart below. This ETF has been trading sideways within a tightening range, posting lower-highs since late May of 2013 while also managing to hold above $28 a share, which has proven to be a key support level (red lines). Fundamentally, the looming uncertainty surrounding the Fed meeting coming up in September has been the culprit behind XHB’s weakness in recent weeks. With all eyes around the globe locked onto the Fed taper, this ETF will likely oscillate until investors find out for sure what policymakers have decided [Download 101 ETF Lessons Every Financial Advisor Should Learn].
Although taking a long position at current levels offers very attractive upside, we feel that the fundamental uncertainty surrounding the homebuilders can easily, and with little warning, inspire further profit taking pressures. We advise conservative investors to wait for XHB to establish more definitive support above its 200-day moving average (yellow line) before jumping in long ahead of the Fed meeting in September [see 7 Rules ETF Day Traders Must Know].
If pending home sales data beats projections, XHB may have the wind at its back; in terms of upside, this ETF has immediate resistance around $30 a share. On the flip side, worse-than-expected housing data can inspire further selling pressures; in terms of downside, XHB has immediate support at $28 a share, while a break below this level would be worrisome. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit-taking techniques.
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Disclosure: No positions at time of writing.