STRONG HOUSING NUMBERS BOOST HOMEBUILDERS AND REITS WHICH ARE IN NEW UPTRENDS -- THAT HELPS EXTEND MARKET RALLY -- SUPPORT LEVELS TO WATCH

HOMEBUILDERS AND REITS ARE IN NEW UPTRENDS ... During the last week of July, I wrote a couple of bullish stories on housing related stocks. I also pointed out that their strong price action was a leading indication of better fundamentals to come in housing. Today's report that July existing home sales surged 7.2% to the highest level in nearly two years surpassed expectations and is further proof that the the housing depression has started to recover. Not surprisingly, homebuilders are among the day's strongest groups. So are REITs which are benefiting from a reviving real estate industry. One of the housing ETFs I showed on July 31 is shown in Chart 1. The Dow Jones U.S. Home Construction iShares (ITB) has broken a "neckline" at 12 and completed an apparent "head and shoulders" bottom. The fact that this week's minor dip bounced off that new support line is further evidence that homebuilders have bottomed. The relative strength ratio (below Chart 1) has been rising since the start of July and also appears on the verge of an upside breakout. Chart 2 shows a similar upturn in Real Estate iShares (IYR). Its relative strength ratio (below chart) bottomed during March and has broken out to the upside as well. Enthusiastic buying of both groups is helping extend the recent rally in financial shares and the market in general.

Chart 1

Chart 2

SECTOR UPTRENDS STILL INTACT ... Two market sectors that are benefiting directly from today's bounce in homebuilders and REITs are shown below. Both are ending the week on a positive note after some earlier profit-taking. The good news is that the XLY and the XLY also stayed above initial chart support along their May/June highs (green line) which is always the first line of defense in a pullback. That kept their uptrends intact. Both also appear headed for a retest of their August highs. That will be an important test for them and the rest of the market. That's because both groups have been market leaders throughout the rally as shown by their rising relative strength ratios.

Chart 3

Chart 4

SUPPORT LEVELS TO WATCH... The good news is that the heavy selling that started the week was contained well above initial support levels in the major market averages which are ending the week on a strong note. Charts 5 and 6 show the Dow Industrials and the S&P 500 exceeding their August highs. That keeps their summer uptrend intact. The Nasdaq has been the weakest of the three all month, but is moving up to challenge its August high (Chart 7). The bad news is that major overbought readings described earlier in the week remain intact. One of the more positive aspects of this week's pullback is that it provides us with some short-term support levels to work with. Those intra-day levels are 9116 in the Dow (Chart 5), 978 in the S&P 500 (Chart 6), and 1929 in the Nasdaq Composite (Chart 7). Prices now have to close below those support levels to signal a market top. I still happen to believe that this is an opportune time to take some winnings off the table. An alternative strategy is to use stopout protection below this week's lows to protect profits.

Chart 5

Chart 6

Chart 7