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Lumber Futures and Housing Stocks Are in the Waiting Room


Things are looking better, but any plays are pending certain market actions.

Summary of Friday's Notable Technical Developments

Stocks and commodities broke their recent inverse relationship with the dollar yesterday. The greenback rose versus most other global currencies yesterday, but stocks and commodities managed to put in positive days anyway. That is a change worth noting -- now we need to see if it develops into a trend. The stronger US Dollar also has had the effect recently of making small-cap stocks outperform versus the large-cap multi-nationals. Bonds meanwhile continue to work through a sideways consolidation. Based on my work, the breakout of this consolidation should lead to more upside in yields and downside in prices.

The chart below shows how the strong dollar is leading to outperformance by the small caps:

Click to enlarge

Thus far today, the equity markets are opening a bit higher as a follow-through to yesterday's positive price action. The commodities space is getting a boost from a greenback that is trading slightly lower versus most other global currencies. With the higher equities and commodities, bonds are selling off modestly as money shifts from safety to risk. The problem with all of this is that volume is still not confirming the renewed positive price action.

Market Internals: NYSE
(Figures are rounded)

Focus of the Day: Lumber Futures and Housing Stocks

Lumber Futures (@LB.P) on a weekly basis:

Click to enlarge

  • Today I want to check in on the technical status of the lumber futures and housing stocks.

  • For lumber futures (@LB.P), I first want to look at the weekly chart to check the status of the long-term downtrend line that I've highlighted here previously.

  • The downtrend line was broken to the upside briefly, which should have turned that line into new support. However, that line is being threatened as I type. A break below that line would (temporarily) negate the positive implications of the breakout. A look at the daily chart is warranted to get a closer look at this developing situation.
Lumber Futures (@LB.P) on a daily basis:

Click to enlarge

  • The daily chart of lumber futures shows a less "textbook" breakout and re-test of the downtrend line that was shown in the weekly chart.

  • In fact, the downtrend line support was not held on the daily chart and it looks more like lumber may pull back to at least the short-term uptrend line, which comes in at around 255.

The Philadelphia Housing Sector Index ($HGX) on a weekly basis:

Click to enlarge

  • A look at the Philadelphia Housing Sector Index ($HGX) shows that the long-term downtrends are still in place.

  • A short-term uptrend has developed, however, so the battle of the trend lines is on to see which will maintain dominance going forward.

The Philadelphia Housing Sector Index ($HGX) on a daily basis:

Click to enlarge

  • The daily chart of the HGX shows a triangle consolidation pattern, which normally resolves itself in the direction of the previous trend (which was up in this case).

  • However, the intermediate-term uptrend line was broken recently and hasn't been recaptured -- yet.

  • That being noted, despite the tendency for triangle breakouts to occur in the direction of the previous trend, I would wait to make a directional bet until the breakout of the triangle actually occurs.

Strategy: Although things are looking better in both lumber futures and housing stocks, it isn't possible to give the "all clear" signal yet. In lumber, I'd recommend waiting to see if the downtrend line can be retaken by the bulls. For the housing stocks, the only play is to trade in the direction of the breakout of the triangle formation -- when it occurs, not before.

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No positions in stocks mentioned.

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