Lumber, paper, packaging and other forestry-related products have been trading within one of the strongest uptrends found anywhere in the public markets over the past several years. However, recent weakness due to global concerns of a slowdown has investors moving away from certain asset classes. In this article, we'll take a look at the charts of several forestry-related assets and try to determine how active traders will look to position themselves over the weeks or months ahead. (For a quick refresher, check out: Charts Suggest Timber and Forestry Stocks Set to Drop.)
The iShares Global Timber & Forestry ETF is one of the most popular exchange-traded products used by active traders for gaining exposure to companies that produce forest products, agricultural products, and paper and packaging products. Fundamentally, this exchange-traded fund (ETF) comprises 25 holdings from around the world and has approximately $500 million in net assets.
Taking a look at the chart, you can see that the price has recently fallen below a major ascending trendline. Notice how the dotted trendline has consistently been able to prop up the price since early 2016. The recent series of closes suggests that the long-term uptrend has reversed and that the bears are now in control of the future direction. The last level of support that is standing in the way of a significant decline is the 200-day moving average, which you can see has so far managed to prove its significance. Several consecutive closes below $75.36 could be the catalyst to a long-term move lower. (For further reading, check out: How to Trade the Pullback in Timber Stocks.)
Another popular ETF that is used by retail investors for gaining exposure to timber assets is the Invesco MSCI Global Timber ETF. A portfolio of 80 holdings, which is relatively large compared with the WOOD ETF mentioned above, makes CUT a favorite from the perspective of diversification. With a market value of $227 million, the fund is not as widely followed, but as you can see from the chart below, the pattern is nearly identical to that of WOOD.
Recent price action combined with the proximity to the 200-day moving average suggests that the uptrend is undoubtedly in jeopardy. The close below the dotted trendline suggests that the 200-day moving average won't be strong enough to stop the bears. Based on this pattern, bearish traders will likely look to trade a break below $32.40 and protect positions by placing stop-loss orders above either the dotted trendline or the swing high at $34.70. (For further reading, see: Technical Indicators Suggest Opportunity for Forestry Stocks.)
A top holding of both above-mentioned funds and one of the barometers when it comes to the lumber and wood production industry is Weyerhaeuser. Taking a look at the chart below, you can see that the price has recently closed below the support of a major trendline, which could be used by active traders as a leading indicator of a major trend reversal. Active traders will expect the bears to continue to drive the price action and watch for the 50-day moving average to close below the 200-day moving average, which would be confirmation of a long-term downtrend. Stop-losses will likely be set above $35.37 or $36.19, depending on risk tolerance. (For further reading, check out: Active Traders Turn Their Attention to Forestry.)
The Bottom Line
Forestry products and the related companies have been darlings of Wall Street since early 2016. However, the recent move below major trendlines suggests that the uptrend is reversing and that a major correction could be in the cards. (For further reading, 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.