There are often market “tells” that occur long before the beginning of a broader stock market rally or correction. And they tend to be sectors/areas of the market that are more sensitive to the economy… for instance, small cap stocks, tech/growth stocks, housing stocks, etc…
When a reversal pattern shows up for one of these sectors, it could be a pre-cursor to what’s coming for the broader market.
The Homebuilders (XHB) started sending a bearish divergence message to the broad market in early January of 2018. It has been a leader to the downside over the past year, declining nearly 40%.
While declining, XHB looks to have formed two falling channels marked by (1) and (2). The counter-trend rally has the homebuilders testing the underside of the falling channel (2) and recent highs at (3). I humbly feel we will get a very important message about where the broad market is headed, by how XHB handles resistance at (3).
Keep a close eye on the homebuilders, as it sent important topping signals at the 2007 highs and once again this past year.
Long stock positions DO NOT want to see XHB peak at (3) and turn lower!!!