Lumber, as seen on the continuous futures contract chart above, has been forming a giant triangle since 2013. To illustrate the significance of this formation, you will recall the triangle I had been watching oil form over the past 2 years. I had blogged a few times on this formation, suggesting that readers watch oil for a breakout. The rule of thumb with symmetrical triangles is that you do not trade them until they break out. A break through the bottom of a triangle means a shorting opportunity, and a break through the upper side suggests a strong upside potential. Oil broke to the downside, and proceeded to not only reach, but exceed my original downside target (green line) – see chart below.
The symmetrical triangle forming on lumber should be watched carefully. A breakout on either side will likely result in an explosive move in the direction of the breakout. A breakout through $350 on the upside, and $315 on the downside might suggest a break from the current triangle consolidation. Should such a move occur, a trader could consider a long or short on a lumber stock, or on an ETF. The only two ETF’s that I am aware of that might follow the commodity to at least some degree are WOOD-US and CUT-US. They hold timber related stocks. The charts of these ETF’s do not replicate that of lumber – but there still will be some influence by the underlying commodity. WOOD needs to break $63 for a potential upside trade. It might be of interest to some readers that seasonality can be positive for lumber from October through to February – although not without its hiccups. seasonal expert Don Vialoux (www.dvtechtalk.com) has noted this tendency in the past. So, if its going to move to the upside, this would be an added factor in its favour.
Trading within a triangle prior to a breakout such as lumber is – is usually a bad idea. My advice remains to watch the lumber chart, and look for a breakout as a potential signal for a trade.
Free Technical Analysis Seminar in Markham with Keith Richards
Markham Village Library: 6031 Hwy. 7 East, Markham, Ontario, L3P 3A7 – Wednesday, November 26, 2014, 7:00 PM