Strong uptrends across the timber and forestry industries over the past couple of years have made these segments quite popular among active traders. More specifically, followers of technical analysis have turned to companies within these segments because the predictable nature of the price action near influential levels of support and resistance has made for some of the most profitable trades within the broader commodities market. In the paragraphs below, we'll take a look at several charts suggesting that the story has changed and that the uptrend has reversed. You'll learn why some traders now think that the bears could be gearing up for a long-term move lower. (For more, see: Trading the Soft Commodity Markets.)
With the rise in popularity of niche exchange-traded products such as the iShares Global Timber & Forestry ETF, traders can now focus their exposure on the global forest products, agriculture products, and paper and packaging products segments. Fundamentally, this fund comprises 25 holdings and predominantly invests in the U.S., Canada, Brazil, Sweden, Japan, Finland and the United Kingdom.
Taking a look at the chart below, you can see that the price was trading along with its 50-day moving average for most of 2018 until the price broke below that level in mid-June. The subsequent decline toward the 200-day moving average had many traders hoping for a significant bounce higher, but to no avail. As you can see from the chart, recent weakness has pushed the price below the long-term support of $77 and has led to the 50-day moving average to cross below the 200-day moving average in a common sell signal known as the death cross. This common long-term sell signal is often used by traders to mark the beginning of a downtrend, and most traders will likely protect their short positions by placing a stop-loss order above the 50-day or 200-day moving averages or the August high near $79. (For more, see: 3 Charts That Suggest Agriculture Commodities Could Move Lower.)
Another exchange-traded product that many traders use for gauging the future direction of the forestry sector is the Invesco MSCI Global Timber ETF. The reason that this chart is of specific interest is because it represents the collective price action of 80 holdings from across the globe and is usually looked to as a leading indicator for how the WOOD ETF is expect to behave. As you can see from the chart, the death cross occurred several weeks ago and has just broken below the swing low near $31.50, which will likely be used as confirmation that the bears are in control of the momentum. (For more, see: These Charts Suggest It's Time to Sell Commodities.)
Rayonier, Inc. (RYN) is one of the companies from within the forestry sector that will be of specific interest to active traders because it is one of the top holdings of the WOOD ETF and looks poised to lead the move lower. Taking a look at the chart, you can see that the price was trading along a defined uptrend for most of 2018 until it broke below the support of the 50-day and 200-day moving averages. The consolidation and subsequent break below $34.85 was a clear sign that the bulls lost conviction of the uptrend and that the bears were taking control. It appears as though the bearish crossover between the long-term moving averages may have acted as a catalyst to a move lower, and many traders will likely use these levels for determining the placement of the stop-orders over the weeks ahead. Active traders will likely hold a bearish outlook until there are some clear signs of a reversal on the chart. (For more, see: 3 Charts That Commodity Traders Will Want to Watch.)
The Bottom Line
Active traders have favored picks from within the forestry sector over the past couple of years, but the recent moves below key levels of long-term support suggest that the story may be changing. Given the number of long-term sell signals such as those discussed above, bullish followers of technical analysis will likely want to remain on the sidelines until indicators start to reverse and point to a move higher again. (For more on this topic, check out: Downtrend in Soft Commodities Looks Poised to Continue.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the securities mentioned.