The following post was initially issued to TLS members on January 12, 2018; the HGX would top out 6 days later and has subsequently fallen by 15% over the past 3 months.

Housing stocks have been hot — but the chart says it may be time for a breather.

The continued rally in stocks to begin the new year has brought a plethora of sectors and segments to levels from which we can reasonably expect a breather or consolidation to take place prior to a resumption or continuation of the rally. In many instances, these levels are marked by key Fibonacci Extensions based off important previous declines. This post looks at one such example in the PHLX Housing Sector Index, or HGX.

The HGX has been on fire of late, jumping more than 20% just since breaking out to all-time highs in late September. As we mentioned in a post at the time, “while this rally in housing stocks may have further room to run in the near-term, don’t be surprised if the stocks’ charts are eventually forced to re-build.” Obviously, no such rebuilding has been forced to take place yet as it’s been straight up for the HGX. However, charts are rarely able to sustainably break above long-term resistance without some form of retrenchment — or rebuilding. And current levels may facilitate such a rebuilding process.

That’s because we presently find the HGX hitting 2 key Fibonacci Extensions near the 360-362 area:

• The 127.2% Fibonacci Extension of 2005-2009 Decline
• The 261.8% Fibonacci Extension of 2015-2016 Decline

Will this level be a roof for housing stocks? We don’t know for sure but, in our view, it is at least a favorable juncture at which to take some profits.

This market is exhibiting melt-up characteristics and we certainly want to take advantage of that. Thus, we would hold onto the bulk of positions, even those hitting key Extensions. However, we have found Fibonacci Extensions to be very reliable and valuable tools in enabling us to take profits on positions before they leak or fade away too quickly. So, while this melt-up can be mesmerizing, and highly beneficial to P&L, it is important to stay disciplined in manging risk, i.e., don’t get greedy.

Besides, there are far worse things that watching the bulk of your position continue to fly higher after you’ve taken a few chips off the table. That is particularly so given the ongoing rotation phenomenon which continues to offer new opportunities for re-deployment of capital.