Breakout Level to Watch for Cup and Handle on XHB Homebuilders Chart

Not only has the homebuilder sector received attention lately (investors often monitor this sector to assess the health of the economy via home purchases), the chart of the XHB Homebuilder SPDR ETF is showing a very interesting pattern that's worth a glance.

Whether or not the pattern plays out is yet to be seen, but we can at least take a look at the current support and resistance areas to watch for clues for the next move, particularly as we face a potential breakout here that will either pick up steam... or taper off into a sell-off.

Here's the overview Daily Chart of the XHB:

Price remains in an uptrend as evidenced by the positive moving average structure, price being above all moving averages, and price continuing to form higher highs and higher lows.  That's bullish.

What's not so bullish right now are the doji candles at the $17.00 level and the negative momentum and volume divergence—all of which serves as non-confirmations and is not what you would expect to see as price is potentially breaking a key resistance level in a bullish trend.

It's assumed that whatever happens as the S&P 500 tests the critical 1,150 resistance level will mirror what happens here in the Homebuilders.  Should buyers continue pushing the market higher and break above the 1,150 S&P 500 level, then homebuilders would also break in a potential impulse move to new highs. 

On the same token, should the broader market pull-back here, so would XHB.

But there's something else going on that's at least worth mentioning.

William O'Neil made the "Cup and Handle" price pattern popular in his famous book How to Make Money in Stocks, and the XHB is forming one of two patterns at the highs.

First, we could be seeing that classic "Cup and Handle" pattern, as I've labeled on a separate chart, or we could be seeing some sort of Inverse Head and Shoulders Pattern.

Here's a focused view on the Cup and Handle Pattern:

The "arc" trendlines represent the "cup" and then the "handle," and O'Neil teaches to buy on a solid/confirmed break above the resistance area, which now rests near the $17.00 level.

As stated earlier, we would expect volume and momentum to be confirming a potential large-scale price breakout that would accompany a Cup and Handle Pattern - we're not seeing that now.  That doesn't mean we can't see it, but that we would expect volume to increase to accompany and confirm any potential breakout here above $17.00.

Another point of note is that Inverse Head and Shoulders and Cup and Handles often form at market "bottoms" instead of forming after sustained (one-year) rallies, so keep in mind that these patterns are not forming in the "price life cycle" as expected.

So, from a swing trading standpoint, watch for a confirmed break above $17.00 for a potential tradable move up to $20.00 or beyond, though if sellers step up and push prices lower at the resistance here (again, with reversal/indecision candles along with negative volume and momentum divergences), be prepared to book profits if you're holding long and consider re-establish positions on a solid "all clear" signal above the $17.00 level.

Whatever the resolution of these patterns, it should be interesting.

 

Corey Rosenbloom, CMT
http://blog.afraidtotrade.com