REITs Show Strong Foundations

This column was originally published on RealMoney on July 6 at 11:00 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

I received a fair amount of email about Wednesday's piece on confidence problems. It turns out that many traders felt that I had discovered their secret Achilles' heel and disclosed it to the world.

Alas, that is the nature of trading. We all battle the same demons; some are just better than others at beating them back.

It is this common thread of emotions that gives meaning to charts. Simply scrutinizing the appearance of squiggly lines on a chart doesn't get you very far.

It is the study of price and volume as a means of understanding the prevailing emotions of the crowd that provides an edge. The closer our assessment of the crowd is to reality, the more likely it is that we'll be successful.

But no analysis is perfect. The best we can do is a close approximation of the emotional dynamics that control the crowd. While most of us instinctively know that our analysis is always flawed, many still struggle with the need for perfection.

For example, losing trades are never closed out soon enough or they should never have been made in the first place.

Winning trades are often closed too soon -- just a little more patience would have yielded far greater profit. Perhaps the winning trade would have been an even bigger winner had the entry been earlier or the size bigger.

All of these glaring flaws lead to frustration. And frustrations hamper our ability to separate ourselves from the crowd that we are studying.

As you deal with a very skittish market comprised of very skittish traders, try cutting yourself some slack. You'll trade better.

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Today, let's look at some Real Estate Investment Trusts. Unlike the homebuilders, the REITs have been pretty resilient.

Archstone-Smith (ASN Quote) has doubled in price over the past three years. Over the past three months, the stock has consolidated within a 10% range. While the best entries have occurred on tags of the middle Bollinger band (this tends to be the case with uptrending stocks), this move above $50 should embolden the bulls and attract more buying pressure.

The breakout in Essex Property (ESS Quote) from a multimonth consolidation is consistent with the rest of the group. While other stocks have been struggling, the REITs have been strong. Congratulations if you are long.

Here's the conundrum I see in Essex. After moving from $105 to $115 in less than two weeks, where do we place a stop? The stock can pull back about 10% before it even hits support. If you place a stop right around $105, you risk getting stopped out just as buyers start coming for the stock. My preferred method for dealing with this situation is position-size management. I'd sell some into strength now and hold the remainder through a correction.

AvalonBay Communities' (AVB Quote) breakout above $110 looks like the start of the next leg higher. The tight Bollinger bands indicate very low volatility. Such low volatility ultimately expands into high volatility. By the looks of the current advance, I'd say that the expansion will be to the upside.

United Dominion Realty (UDR Quote) gradually moved lower after March in a series of lower highs and lower lows. However, the June low was higher than the May low. That was the first signal that selling pressure was diminishing.

The current breakout above $28 established a higher high and brought the stock up to within $1 of its all-time high. I'd look for more gains here, but I'd also use a protective stop just beneath the recent low.

Camden Property (CPT Quote) looks very similar to Essex: a multimonth consolidation and a breakout from a lower high. RSI is consistently above the 60 level. Such a high level of support is consistent with a strong uptrend.

As with Essex, the strong rise over the last week and a half makes stop placement difficult. I'd always prefer to buy on a successful test of a breakout because the entry is closer to support, enabling me to cap my losses with a tighter stop.

Be careful out there.

P.S. from TheStreet.com Editor-in-Chief, Dave Morrow:
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