Commercial Real Estate on the Brink

iShares Dow Jones U.S. Real Estate

The ETF has declined about 50% from its spring 2008 levels. In the process of that decline, the major long-term uptrends were broken, and significant support levels were violated, indicating that the stocks in this sector are now in a long-term downtrend. As such, we should be looking for retracements in that downtrend to find an opportunity to short the sector.

Over the past few weeks, that opportunity has occurred as stock prices have drifted higher. Notice we said drift, which means the rally has been on lighter volume than the decline, a sign of few buyers and just a lack of sellers. The rally of the IYR back to the $40 area provides a low-risk entry into the short position. This bearish flagging configuration is one that indicates weak buying and risk of further decline. We would use any strength back to the $40 level to establish shorts with a stop in the $43 to $44 level. Look for the lows in the mid $20s to be tested.

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Know What You Own: Some of the holdings in the IYR include Annaly Capital Management (NLY - commentary - Cramer's Take), Avalonbay Communities (AVB - commentary - Cramer's Take), Boston Properties (BXP - commentary - Cramer's Take), Equity Residential (EQR - commentary - Cramer's Take), HCP Incorporated (HCP - commentary - Cramer's Take) and Host Hotels & Resorts (HST - commentary - Cramer's Take). For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.

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At the time of publication, John Hughes and Scott Maragioglio had no positions in the stocks mentioned.

Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.