Why There is Another 20% of Upside in Lumber Prices

JC Parets
March 4, 2016

From the desk of Thomas Bruni @BruniCharting

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If you're a market participant, Lumber should be on your radar. The weight of evidence suggests that this market has upside roughly 20% upside from current levels and offers a trade opportunity not correlated to US equities.

Lumber has been in a structural downtrend since breaking down from a symmetrical triangle in early 2015. The decline continued throughout the year, with prices putting in a failed breakdown and bullish momentum divergence at long-term support near 215. After confirming the failed breakdown by closing back above the May 2015 lows, prices consolidated for 5 months and have now broken out above a multi-year downtrend line.

As long as prices are above the downtrend line from the December 2014 highs, it remains appropriate to approach this market from the long side. This breakout has room toward prior support near 315-325, but will have some tactical targets along the way.

Lumber Weekly Chart Image 1

The daily chart provides a more tactical view of this breakout. In late February prices broke out above the downtrend line from the December 2014 highs, retested the breakout area, and closed above the top of the range outlined in gray.

Despite momentum giving mixed signals, the 200 day moving average is now rising and should support higher prices. Longs can trade against the breakout area of 263 and look to take profits near 295-300. This area represents the 161.8% extension of the December-January decline, the measured move target of the October-February range, and prior support.

Lumber Daily Chart Image 2

The Bottom Line: Whether approaching this from a structural or tactical perspective, the risk is well defined and the risk/reward is elevated.

From a structural perspective, I only want to be long above the downtrend line from the December 2014 highs and would be looking to take profits at prior support near 315-325. This represents roughly 16-20% upside from current levels.

From a tactical perspective, I only want to be long above prior support / resistance at 263-265 and would be taking profits near 295-300. This represents roughly 8-11% upside from current levels.

Either way, longs want to see this breakout accelerate with momentum hitting overbought conditions in the coming days / weeks.

As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can. @BruniCharting

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JC here - I like what Bruni is seeing in Lumber. I remember that breakdown early last year very clearly. I was waiting patiently for what should have been a bullish resolution and breakout to the upside. When bullish continuation patterns resolve negatively, the implications can be devastating. Lumber last year was no different. At this point, I particularly like how well-defined the risk vs reward is in this trade. It's definitely there.

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Tags: $LB_F $SPY

The author does not have a position in the mentioned securities at the time of publication. 

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