Commodities Weekly: Time for a Pullback in Lumber?

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

Lumber futures have been on an absolute tear since last spring. The vertical but volatile price action off last year's lows is something for the history books.

After trading down to 250 in late March of 2020, Lumber has since shot back above 1,600, where it trades today. It’s no wonder social media is full of people flaunting their wealth with stacks of timber. 

But we have to ask... is it time for a pullback? Is this rally overdone here? 

Let’s take a deeper look and discuss why we believe the logical move for Lumber over the short term is sideways... or even lower.

Here’s the chart. Look at that face ripper - up nearly 7x in just over a year!

Lumber futures just barely sliced through our target of 1,636 last week, yet have fallen back below that level in recent sessions.

This action makes perfect sense considering we’re at a logical level for price to digest these monstrous gains.

As you can see in the lower pane, last summer Lumber registered its highest overbought momentum reading since February of 1993 with a weekly RSI-14 0f about 90! Combine that with the potential bearish divergence that's been in play ever since and a pause in the uptrend and period of corrective action here seems even more likely.

In fact, some digestion of the recent gains would be a healthy and welcomed development after such a strong run.

And that is true for a lot of economically sensitive commodities right now, not just Lumber...

For example, take Aluminum and Tin, which we discussed last week as prices approached our targets and potential levels of resistance. This week, to no surprise we’re seeing both of these industrial metals retreat lower.

While not an industrial metal, Lumber is as good of a sign of economic health as any commodity these days. One could argue it is an even better barometer than Dr. Copper for the present day's real economy. And guess what, just like Copper and other base metals, Lumber is also finding sellers at a logical level of overhead supply this week.

Notice the trend?

Risk-on commodities, many of which have been leading for over a year now - are hitting their objectives, prior highs, or other areas of supply.

This is all happening at the same time, and this theme is not at all unique to commodities. We're seeing the same thing in other risk assets, particularly from major sectors and indexes in both US and international equity markets.

We want to continue to take profits at our objectives and pay close attention to how prices react at these crucial levels of interest. This should give us some great information in the coming weeks.

So, back to Lumber. Here's how we're playing it.

It's an opportunity cost below 1,636 and we want nothing to do with it in that environment. But if and when price reclaims this key level, we want to be buyers again and long with an upside target of 2,563. 

Thanks for reading. Let us know what you think, and be sure to download this week’s Commodity Report below!