Taking the short trade in homebuilders

I am recommending taking a short side trade on the homebuilder stocks. Over the last few days, I have mentioned that homebuilder and related investments have hit my initial volume off the high screens (here, here, and here). Although most never made the final visually-based cut, I mentioned that apparent trend could be an indication of money rotating out of the group, that a correction may be in offing, or as this CNBC video commnetary suggests, shorts moving into the group.

I took a broader look at the homebuilder ETF's, specifically S&P Homebuilder SPDR (ticker XHB) and the
Powershares Dynamic Building & Construction ETF (ticker PKB). Both are showing distribution at or near the highs. In addition, PKB is also looking like it could be a future volume off the high candidate. The following are the charts for XHB and PKB.

What is peaking my interest on the short side is the divergence in the price trend versus the stochastics and RSI. The ETF peaked on an intraday basis on September 23, touching $26.16. This compares to the stochastics that peaked back in mid-August and a RSI that peaked September 14. These divergences could be an indication of a trend change. In addition, I am seeing signs that traders are losing conviction to the upside. First off, trading on September 23 closed with a doji, indicating indecision at the top of a trend. In addition, volume pick up to downside following the doji signal, to me signaling that traders are starting to take profits.

The same price trend and indicator divergence is present on the chart of PKB. However, the volume to the downside is more severe, probably due to the low average trading volume. This downside volume suggests that traders are losing conviction.

Based on this analysis, I am taking a short side trade recommendation in homebuilders. You can track the performance of any short transaction using the public profile page of the short trade recommendation page on Marketocracy here.