Bear Chart of the Day -- Avoid iShares U.S. Real Estate

 

NEW YORK (Real Money) -- The selloff continues and it's hard to chase down on the short side. Any broad-based bearish chart comes with a grain of salt. This is the same approach, though, as a bullish chart that has run higher. You simply have to look for the counter-trend bounce for a better risk-reward on a short entry and take your shot there. If it happens, fantastic. If it doesn't happen, you simply keep looking around for attractive setups.

The selloff hasn't been restricted to equities. In fact, U.S. Treasuries have been hit hard with a drop in price, so obviously rates have been on the rise. It isn't just bonds that feel the pinch, but also yield-sensitive equities such as utilities and real estate investment trusts, or REITs. My concern right now, however, is more with the REITs than utilities. Both are at risk, but iShares U.S. Real Estate  (IYR) appears more bearish.

The longer-term picture is the real concern. This chart shows just how important a bounce from the current level is for bulls. If we were to see a few weekly closes in a row in the $72-$75 area, the pressure would really be on.

Right now, we have this "M" price pattern which is bearish in nature. In order to negate this pattern, IYR needs to trade back into the $77-$78 range for a few weeks. The bulls have now lost momentum and trend along with moving averages as all point bearish. If a trader is bearish on Treasuries here, then noting the correlation between long-term Treasuries and IYR is important. While there are a few weeks of low correlation over the last two years, they are scant. Most of the time it is in the 0.60 to 0.80 range, so the correlation, while not strong, would be considered moderate. In other words, don't expect REITs to skyrocket higher if rates are rising. Even the most aggressive short, though, should note the $77-$78 area and consider it a stop, while anything over $82 should absolutely be a stop, not a consideration.

I believe waiting for a small bounce is the best bet for a short side entry. However, I don't find trying to play the bounce a very good risk-reward. The market finally looks like it is undergoing a change and right now REITs lead my list of sectors to be concerned holding on the long side.

Editor's Note: This article was originally published at 11:48 a.m. EDT on Real Money on May 6.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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