At this point I feel like the boy who cried mean reversion, but this type of setup keeps showing up in the commodity complex, so I’m going to continue writing about it. The same conditions we’ve seen thus far in Crude Oil, Sugar, Copper, and Oats over the last few weeks, are now present in Lumber futures. We’ve gotten some decent moves in the names mentioned above thus far, so I’ll outline what I’m seeing in this market and let you draw your own conclusion.
First off, from a seasonal perspective September is by far the worst month of the year for Lumber. The fact that prices have ignored this bearish tendency thus far is very bullish and signals to me that there are larger forces at work in this market. In terms of sentiment, the public has not been this pessimistic about Lumber since late 2008, right before prices bottomed and began moving higher.
This backdrop is quite bullish for prices over the next few months, so let’s see if the price action is providing us with an equally compelling reason to be involved on the long side.
On the weekly chart we can clearly see prices moving lower after breaking down from a long term symmetrical triangle earlier in the year. What catches my attention is the flat 200 week moving average, which tells me that both rallies and selloffs will be hard to sustain until we get a decisive rollover in this long term moving average. This combined with a recent false breakdown in price and a positive momentum divergence make this market a great mean reversion candidate.
On the daily chart we can see prices trading lower below a downward sloping 200 day moving average with momentum in a bearish range. This signals that the bears have clearly been in control over the long term, but that is beginning to change in the short term. After breaking the May lows, prices made an additional low with momentum positively diverging. After a few days of basing prices broke back above the accelerated trendline and are now breaking back above the May lows and downtrend line from the July highs. With prices 20% below the 200 day moving average, there is definitely room for the bulls to run.
From an intraday perspective we can see the false breakdowns and subsequent breakouts above resistance more clearly. My only concern for this market remains the downward sloping 200 hour moving average. Until this can flatten out and begin rising, I think rallies will be difficult to sustain. That being said, it would be extremely constructive for prices to continue to consolidate above the May lows and the downtrend from the July highs, but I wouldn’t be surprised to see another retest of support down near the 233 area.
The Bottom Line: The weight of evidence is suggesting that there is a change in character in the Lumber futures’ market in the short term. Given the bullish backdrop provided by sentiment and seasonality, combined with the improving price action across all timeframes, it is worth taking a look at Lumber futures on the long side here. Ideally we want to see prices consolidate in the 233-242 area to allow the 200 hour moving average to flatten out and begin rising, followed by a continuation to the upside in price. Managing the entry is a bit difficult here given that the presence of that downward sloping 200 hour moving average making me think we that we get a retest of lower prices. Personally I’d be looking to get long on a retest of the breakout area of 233 or out of a consolidation once the 200 hour moving average begins rising. With prices 20% below the 200 day, I think we could get a quick rally to the upside like we’ve seen in the markets I mentioned at the top of the post. With that said, I’d be looking to take profits up near prior support and the 200 day around 275-277.
As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.