How to Trade the US Pending Home Sales: A Comprehensive Guide
Introduction
The US Pending Home Sales report provides crucial insights into the housing market and consumer behavior in the United States. This guide will share the exact strategy that professional traders use to profit from market movements. By following our step-by-step guide, you’ll learn how to level the playing field and effectively trade the US Pending Home Sales report.
Understanding the US Pending Home Sales Report
The Pending Home Sales report, released monthly by the National Association of Realtors (NAR), measures the change in the number of homes under contract to be sold but still awaiting the closing transaction. It is a leading indicator of housing market activity and future home sales.
Why the US Pending Home Sales Report Matters
- Tier Two Event: The Pending Home Sales report is a tier two economic event, meaning it has moderate implications for the US economy and financial markets. Major deviations from expectations can lead to noticeable market movements.
- Economic Indicator: The report reflects the strength of the housing market, which is a significant component of the economy. Rising pending home sales indicate increased demand and consumer confidence, while declining sales suggest potential challenges in the housing market.
- Influencing Policy: While not as directly influential as other major economic indicators, the Pending Home Sales report can still provide context for Federal Reserve decisions by highlighting trends in consumer behavior and economic health.
- Investor Confidence: The data impacts investor confidence and market sentiment. Higher pending home sales suggest a robust housing market, attracting investment and boosting market confidence. Conversely, lower pending home sales may signal economic challenges and reduce investor confidence. Understanding these dynamics helps traders anticipate market reactions.
Why the US Pending Home Sales Report Often Won’t Move the Market
- Lagging Indicator: The Pending Home Sales report is often considered a lagging indicator compared to other real-time economic data. It reflects contract activity based on past and current economic conditions rather than providing forward-looking insights.
- Market Prioritization: Traders and investors typically prioritize more immediate and impactful economic indicators, such as employment data and inflation reports, over the Pending Home Sales report. As a result, its market impact is generally less pronounced.
- Expectations Management: The market may already have priced in expectations based on other economic data and forecasts. If the Pending Home Sales report comes in line with or close to expectations, it might not cause significant market movements. Significant deviations from expectations are required to generate notable market reactions.
Trading Strategy for US Pending Home Sales
Step 1: Analyze Federal Reserve Priorities
The first step is to understand what data points the Federal Reserve is currently focused on. If the Fed is focused on housing market data, then the Pending Home Sales report will have a significant amount of volatility because the Fed is in some way basing its interest rate decisions on that data release. To quickly determine the Fed’s current focus, you can use our Professional Economic Calendar, which includes a fundamental guide. This resource helps traders stay updated on the data points that matter most to the Fed, providing a strategic advantage.
Step 2: Use High-Low Expectation Forecasts
Professional traders rely on high-low forecasts to gauge market expectations accurately. Here’s a more detailed look at why these forecasts are crucial:
- Institutional Forecasts: Professional economic calendars include high and low estimates from top institutions. This broader range of expectations offers a more comprehensive picture of potential outcomes.
- Market Shocks: When a report exceeds the high estimate or falls below the low estimate, it’s a huge shock to markets because no analyst expected it. Such deviations often result in sharp market movements.
- Lightning Bolt Feature: This tool immediately signals a deviation above the high or below the low of analyst expectations. When a deviation occurs, the lightning bolt feature alerts traders instantly, allowing them to act without delay. The quick reaction to unexpected data can be the difference between a profitable trade and a missed opportunity.
Understanding High-Low Forecasts
Economic forecasts are derived from surveys of credible institutions, each providing their best estimate on upcoming data points. Retail calendars typically present the median of these estimates, which can be misleading. The median forecast doesn’t reveal the full range of expectations and, therefore, doesn’t indicate how surprising an actual data release is compared to the extremes of analysts’ projections. In contrast, professional economic calendars include both high and low estimates. This additional information shows the analysts’ expectations at the extreme ends of their projections. Great trading opportunities arise when data releases fall outside these high and low estimates, creating market shocks that move prices significantly.
Step 3 - Choosing the Most Volatile Instrument to Trade
Using insights from institutional reports, traders can select the most responsive currency pairs. For example, if USD/JPY is particularly sensitive to economic data as outlined by the City Economic Surprise Index and the US Pending Home Sales report shows a significant deviation, this pair could be an ideal target for trading.
- City Economic Surprise Index: This report identifies currency pairs that react strongly to economic surprises. It highlights pairs that are sensitive to data deviations, helping traders focus on the most responsive markets.
- Risk-Reversal Report: This report shows market positioning, revealing a buildup of call or put options on certain currency pairs. Understanding these positions helps traders choose a pair that may have orders susceptible to getting liquidated upon the release of an economic data point.
- CFTC Report: This report details hedge funds' positions; if a lot of big players are long the USD/JPY but then data comes out against the USD, some of those funds might have to unwind their positions leading to an outsized move. Good thing you didn’t trade the GBP/USD.
Trade Execution Steps
- Confirm Fed Focus: Ensure the Federal Reserve is currently emphasizing housing market data. If the housing market is a primary focus, the US Pending Home Sales report will have a higher likelihood of moving the market. Remember, if the central bank is focused on the data point, it’s because they are using that data point to make a decision on rates. This is the reason data points that are focused on cause volatility.
- Check Forecast Ranges: Before the data release, review the high and low forecast expectations for the event. Plan to trade only if the actual data significantly exceeds the high estimate or falls below the low estimate. This strategy ensures you act on genuinely surprising data and there will most likely be a follow-through reaction.
- Monitor Revisions: Check for any conflicting revisions in the data, as these can alter the initial market reaction. Make sure the primary release and any revisions align to support your trade.
- Enter Trade Promptly: Once you confirm the deviation, act quickly to enter your trade. Enter within the first 30 seconds. Speed is crucial, as market reactions to significant data surprises happen rapidly.
- Set Stop and Take Profit:
- Stop-Loss: Place your stop-loss below the low of the initial spike candle to protect against adverse movements.
- Take Profit: Aim for 15-30 pips for tier two events like the US Pending Home Sales report, adjusting based on market conditions and volatility.
Managing the Trade
Managing the Trade
- After the Initial Run: Look for a shallow pullback around a 23% Fibonacci retracement or near support/resistance levels. This initial pullback can provide an opportunity to enter the trade again after you’ve taken a few points off the table after your first entry.
- Break Even: Move your stop-loss to break even as soon as possible to protect your gains. The stronger the release, the shallower the pullback. Moving to break even is essential because the market should want to buy off your S&R level and continue to the highs of the one-minute candle and break. If that doesn’t happen, something could be off.
- Reentries: If your initial position is stopped out at break even, consider reentering at deeper retracements, such as the 38% or 50% Fibonacci levels. Use nearby support and resistance levels to guide your reentry points.
Conclusion
While the US Pending Home Sales report may not always lead to significant market movements, understanding its nuances and using a professional trading strategy can help you capitalize on unexpected deviations. If you don’t have the tools mentioned above, try out our Professional Economic Calendar Package and use institutional tools to level the playing field. By following these steps, you’ll be well-prepared to trade the US Pending Home Sales report effectively, leveraging the same strategies that professional traders use to profit from this economic data release.