The REIT sector has held up much better than expected over the past year, as many expected this group to be hit hard by weak consumer spending and falling real estate prices. But while REITs have held up overall, the group is starting to come under pressure, leaving many stocks in this group at a critical juncture.
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Hospitality Properties Trust (NYSE:HPT) is an REIT that had been attempting to build a base, but recently broke under a critical support level near $21. The pattern resembles a head-and-shoulders pattern, which is a common topping pattern. HPT is attempting to climb back into the base negating the top, but could face an influx of sellers near this level. The $21 area should be monitored to see if buyers can overcome the selling pressure. (For more, see The REIT Way.)
After reviewing a few charts like HPT, I expected the rest of the group to be just as weak. However, this wasn't the case as many of the REIT's were above important support levels despite the weakness shown over the past few weeks. SL Green Realty Corporation (NYSE:SLG), for example, broke down under an important level in early July as it undercut support near $54, but managed to get back above this level a few sessions later. While the current short-term trend is down, the bounce back into its base was a positive. The two levels to watch moving forward are the $54 level that was prior support and the new low set near $50.
Federal Realty Investment Trust (NYSE:FRT) is another REIT that has managed to hold above the bottom of its base. It dropped sharply in May undercutting its prior lows, but bounced back pretty quickly. It fell toward $68 on a few more occasions and held support. Currently, FRT is testing a trendline that has been following its most recent rally attempts and FRT may experience some selling pressure. This is a critical level, as a failure near these levels could lead to another trip down to the bottom of the base - and a possible breakdown. (For more, see Track Stock Prices With Trendlines.)
Simon Property Group (NYSE:SPG) is in a similar pattern to FRT with a few distinct differences. SPG recently broke support near $80 rather than holding this level, although it did climb back into its base a few days later. Much like FRT it is approaching a trendline marking the tops of its recent rally attempts, but still has $5 to go before reaching this area. This bounce attempt is just as critical for SPG, as a failure to reach the top of the base would imply a probable trip back down to the bottom of the base - and a possible breakdown.
While most of these stocks have shown strength by climbing back into their bases following weakness, they are all at critical turning points. They have been steadily setting lower highs, showing that sellers are becoming more aggressive; if that pattern holds up it could lead to these stocks topping out near their current levels. If they do turn lower, it would likely lead to another test of critical support levels and a possible breakdown. Stocks typically test a level a few times, but the more often they do, the more likely it will break through that level. How this sector reacts to these levels will be critical to the next move for these stocks.
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At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.