It can be difficult to wrap our heads around the reasons why a diverse market index is bullish or bearish. Often times, the index is nothing more than a mathematical derivation from a disparate set of inputs. Think about an industry group such as “specialty retail,” for example. It is more of a bin for the unclassifiable than anything else.

That is the feeling I get in the real estate investment trust (REIT) sector. After all, there is not much similarity among hospitals, storage facilities and apartment buildings beyond the common denominator that real estate is involved.

From a technical point of view, however, a bottom-up analysis suggests the sector as a whole is in trouble. Basically, if enough component REIT stocks look ready to fall then the index must follow suit.

At first glance, the iShares US Real Estate (NYSE: IYR) looks as if it is clinging to a short-term trendline breakout. The problem is that no matter how the chart is presented, the long-term picture shows a trendline breakdown.

It does not make a difference beyond nuance if we use a linearly or logarithmically scaled price axis or choose different origins for the long-term trendline — the breakdown is clear. This suggests the rally from the September low was merely a test of the long-term breakdown.

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At a minimum, it points to shares revisiting their summer lows, 4.4% below current trading. The problem is that a 4% move is hardly worth the risk. But the diversity within the REIT sector can be exploited to find a better trade. Many of IYR’s components have a lot more downside potential before they reach decent support levels. 

The notorious thief Willie Sutton was once asked why he robbed banks. He responded: “Because that’s where the money is.” And that is why I think apartment REIT Equity Residential (NYSE: EQR) is a good choice for trading on the short side. 

EQR is trading near it 52-week highs but shows all the technical signs that it is about to join its weak sector. And given its relatively lofty levels, there is plenty of room below. 

Since October, the stock has traded in a range with rising lows but barely rising highs. Chart watchers will recognize a rising wedge pattern with its suggestion of a tiring rally. 

Momentum indicators confirm this thinking by setting lower highs. In technical jargon, that formed a bearish divergence between price action and indicator. Typically, it is price that changes course and, in this case, that would be to the downside.

Adding to the bearish case, on-balance or cumulative volume shows a clear declining trend of its own. That tells us bears are more aggressive than bulls as more shares change hands on down days than on up days. In other words, supply outweighs demand. 

Overall, it is a fairly simple analysis. Declining indicators, stiff overhead resistance, a weakening sector and even collateral damage in homebuilding and mortgage finance all combine to create a vulnerable condition. 

I am not looking for a bear market here as there is ample support below from the bull market trendline drawn from the 2009 low. EQR is likely headed for the high $60s, though, not far from the August/September lows. 

If and when prices reach that target, we can reevaluate the bigger picture to see if the bull trendline breaks or holds.

Recommended Trade Setup:

— Sell EQR short at the market price
— Set stop-loss at $83
— Set initial price target at $68 for a potential 14% gain in eight weeks 

Note: For traders looking for even bigger gains, there is a simple strategy that could allow you to make a 150% profit on that 14% move by risking just $580. To find out how, follow this link.

This article was originally published on ProfitableTrading.com: Chart Predicts This Stock is About to Plummet