Farley: Wait for Proof of Turnaround

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Phlx Housing Sector Index (HGX)

Click here for larger image.

Source: eSignal

Finally, look at this weekly chart of the Phlx Housing Sector Index (HGX). Do you see a strong pattern, or a weak one? Do you see a buying opportunity, or an accident waiting to happen? Honestly, there's no compelling reason to buy the homebuilders after looking at this depressing graphic. That said, the group looks a tad better than banks or brokers.

I'm encouraged by the index remounting the broken low at 118. But the victory is just a baby step, and we need a lot more evidence before trusting the sector's long-term upside. At a minimum, I'd like to see the recovery effort continue and terminate the long string of lower highs. That technical event requires a solid thrust into the February high at 160.

Of course, banks, brokers and homebuilders have attracted a deluge of bottom-fishing capital since the July low. But honestly, how far has that dangerous strategy taken you in this painful bear market? A far better plan is to protect your capital now and wait until those sectors finally pound out lasting bottoms.

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Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.

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