Is Lumber About to Have a Monster Breakout?

One of the more interesting developments in the commodities recently is the potential I'm seeing in the Lumber market. We are at the upper end of a massive symmetrical triangle and quickly approaching the apex. This increases the likelihood that there will be a resolution out of this pattern very soon. Some of the other variables factor in as well to help us anticipate the direction of this break. Members of Eagle Bay Solutions receive updates on these charts every week:

Here is a weekly Candlestick chart of Lumber futures at the upper end of this giant pattern well-defined by two converging trendlines. I apologize for all of the lines. You guys know I like to keep my charts clean, but they each represent something important, so bear with me.

We tried to breakout above the upper of the two trendlines in August but quickly failed. What I like is that after a brief correction, we are now bumping up against this level once again. The more times that a level is tested, the higher the likelihood that it breaks. And I think one is coming very soon. Also, there is a second, less steep downtrend line (in purple) from the highs last October. I would argue that a breakout above the August highs would confirm that we are heading much higher and have cleared both trendlines.

There are a couple of other factors at play here as well that lead me to believe that an upside breakout is the higher probability outcome. We have an upward sloping 200 week moving average signaling a longer-term uptrend. This type of pattern, a symmetrical triangle, is by definition a continuation pattern. So a resolution in the direction of the underlying trend is perfectly normal. Also, momentum never reached oversold conditions on the 2013 and 2014 Spring sell-offs. Again, another positive for this market that momentum is in a bullish range.

A break above this dotted line representing August resistance would give us our entry point with a stop back below that. If we fail up there, we don't want to be in it. We only like it above the August highs. This gives us an excellent risk/reward ratio as the price target would be up near 500 which represents about a 150-point move based on the size of this particular pattern (Sept 2012-March 2013 Rally).

I like the potential risk/reward opportunity that will be setup if we do get that confirmation. I think it's worth keeping a close eye on this one going forward.

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Tags: $LBS $CUT $WOOD