Homebuilding companies became one of the most thriving market sectors during the past two years. But nothing lasts forever. It’s possible the glow of building new homes has faded and this sector appears headed into a lower range.

Simpler’s traders see the homebuilder sector with potential for a solid swing trade during the next several weeks. This is a broad time frame that could play out if the right setup presents itself within market volatility.

(Check out the free video, above, for insight into trading this changing market.)

Traders at Simpler have followed this homebuilder sector closely, watching for a chart pattern indicating a directional move. Because of that fading luster of home construction, homebuilder stocks look to be set up for movement into lower prices.

By taking a look within the scope of the accompanying exchange traded fund (ETF) – S&P Homebuilders ETF (XHB) – and a few primary components, traders can gain insight into the trading direction of this sector.

Traders Watch For Homebuilder Signals

To find which direction this homebuilder ETF may be setting up to move, as opposed to trading sideways, Simpler’s traders are looking for squeezes – or periods of consolidation and compression – on the charts.

Early signs of movement in the S&P Homebuilders ETF (XHB) price action are showing. The target price between $65 and $70 has maintained its position in this range for the past six weeks. 

This sideways position can only last for so long.

XHB could spike upward – becoming a $70 or more product – or it may fade further. As Simpler’s traders apply their chart analysis tools, this homebuilding ETF looks as if it has the potential to drop into the lower range.

Simpler’s traders watch for signals of price movement and direction with proven methods and tools like Fibonacci and Voodoo Lines®. For XHB, as long as the resistance continues to hold on the upper end of the chart, then $58 becomes the target for Simpler’s traders.

Using proven chart analysis and tools for measuring the swings from the upper range to the lower range of price action, a bearish move in XHB would complete the swing. This is the movement to watch.

Fibonacci Chart Patterns Reveal Market Movement

Fibonacci chart patterns can reveal how the market unfolds into a series of repeating, symmetrical patterns, or movement. The Golden Ratio – which comes from Fibonacci number sequences – appears frequently in nature, and in price patterns on stock charts.

For traders, Fibonacci retracement levels are important trading signals that offer a level of “certainty” in an uncertain market. These indicators are based on percentages.

These price levels of support and resistance are points on a trading chart where a potential reversal in direction could happen. Fibonacci levels can be used to establish entry and exit points for potential trades.

In this volatile market, Simpler’s traders use Fibonacci analysis to find resistance in indexes and stocks that may reveal trade possibilities. Similar to assembling a puzzle with a number of pieces, Simpler’s traders combine signals such as the 21 exponential moving average (EMA) and volume with the 61.8 Fibonacci retracement level to make their decisions regarding a trade setup.

Back to the XHB homebuilder ETF, by moving back to the low end of the range this price action looks poised to break out of its sideways movement.

There are no guarantees the market will move the direction indicated by charting tools. But applying these tools with discipline allows traders to follow established signals for the opportunity to take trades in either direction.

Earnings Report Spurs Grumbling

Upscale American home-furnishings company Restoration Hardware (RH) earnings report gave mixed signals when it released its earnings report this week.

Restoration Hardware is headquartered in Corte Madera, California, and sells its merchandise through its retail stores, catalog, and online.

Following the earnings report, investors grumbled about guidance and softening demand. RH price fell 13% after the company offered soft guidance for the second quarter – while at the same time the company also announced a three-for-one (3:1) stock split.

To sort through mixed messages like those from RH, Simpler’s traders turn to their predetermined trading plan – the answers are in the chart signals.

In the RH example, if the resistance from the upper range remains intact, this gives traders a target at the other end of the range – taking Restoration Hardware all the way down to the $250 level. Time will tell if this plays out.

This also provides an opportunity for the same movement that traders might expect to see from XHB. By watching for movement to the downside, there may be short opportunities.

Take Measured Steps With ‘Voodoo’ Roadmap

Here is a look at another example – longtime player in the homebuilding market, Home Depot (HD). This ticker presents a similar opportunity with its price action.

The Voodoo Lines® indicator roadmap shows that failure at the “fireline” should take the price action into the lower end of the range. Simpler’s traders don’t need to set up the short trade for the entire move. The opportunity is there for traders to manage the trade as price moves lower in measured steps.

The price action in this homebuilding stock also shows replicated moves in swing-high to swing-low movements on the charts. When the first move is measured and moved to the following swing-high to swing-low, similarities are revealed – meaning one more wave of price action could unfold in a similar fashion. Should this price action evolve, this will determine where Simpler’s traders focus their next round of decisions.

Simpler tools, strategies for trading

Why do Simpler’s traders use Voodoo Lines® to make these assessments?

Whether trading stocks, options, or futures, Voodoo Lines® helps traders “map out the market” and predict future price levels. That’s why these simple lines on the chart are a favorite tool of traders, as they can combine Voodoo Lines® with their own options strategies (and other chart indicators).

Emotions and gut feelings are dangerous trading strategies, which is why our traders rely on proven trading tools to keep their heads in the game.

Simpler’s traders use chart tools that are backed by a solid track record and calculated probabilities as they maneuver through volatile markets with shifting sectors.