Sunday, August 18, 2013

Housing Market - Down Trend Resumption

As mentioned in the last post, housing market and real estate markets have completed a Head and Shoulders pattern. This pattern is considered to be a topping formation, and is followed by significant declines. A similar pattern was completed by Emerging Markets (link) and Bond Market (link) in April/May time frame, which resulted in a sharp decline in both of these markets.

Since this pattern is now showing up in both real estate and housing markets, we should be careful of a similar sharp decline in the U.S. housing ETF, which would mean that the overall housing industry is going back down. This downtrend in housing might be a pre-cursor to another leg down in the overall U.S. economy because U.S. economy is greatly dependent on the housing market.

In order to better understand the U.S. housing/real estate markets longer-term trend and to take current H&S formation in perspective, we are going to analyze the long-term Elliott Wave analysis of these two indices since 2005-2006 market peak. Although we did not notice it till much later, 2006 really marked the start of the recession in the U.S. economy.

First chart shows the Dow Jones House Construction Index. It is evident that from 2005-06 top, market declined in a clear 5-wave fashion to mark a bottom in 2009. To remind everyone, 5-wave declines mean that the primary trend is down, and these declines are typically followed by a sharp rally to correct the initial decline.

This initial 5-wave decline was followed by a 3-wave rise (also shown below) and demarcated by A-B-C. 3-Wave rise are corrective in nature, and typically suggest that the primary trend (downwards in this case) will soon re-assert itself.

This analysis tells us that from an Elliott Wave perspective, house builders have completed their corrective rally, and will soon start another leg down. This would indicate that housing overall will again decline in the future.

From a Fibonacci perspective, following chart shows that the recent rally in house construction index has undergone a common ~38.2% retracement. This retracement is in harmony with the 2nd wave corrective action, and tells us that we should expect further declines.

To conclude, long-term Elliott Wave analysis of the housing sector suggests that we will soon experience further pain in this sector. In the next update, we will explore the real estate sector to further understand the overall housing industry and its future direction. Overall, if this index does not make a new high soon, we will soon start to see a lot of "For Sale" signs in our neighborhood. 

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