Over the past several years, the global timber and forestry market has been trading within one of the strongest uptrends anywhere in the public markets. Recent talk of trade wars and shifting in long-term supply and demand cycles seem to have spooked investors, and the charts are suggesting that this sector could be in the process of reversing. Specifically, breakdowns below key support levels such as key trendlines and long-term moving averages are being looked at by technical traders as a leading indicator of future selling pressure and could be a useful warning for the bulls who are contemplating their asset allocation strategies for the last half of 2018. (For more on this subject, see: How to Trade the Pullback in Timber Stocks.)
Investors and traders who seek exposure to companies that produce forest products, agricultural products, and paper and packaging products often turn to the iShares Global Timber & Forestry ETF (WOOD). Fundamentally, this niche fund is an ideal way for those seeking targeted access to 25 timber and forestry companies from around the world and carries an expense ratio of 0.51%.
Taking a look at the chart, you can see that the fund has been trading along a clearly defined ascending trendline since the start of the run in mid-2016. Notice how the trendline was able to prop up the price on each attempted pullback along the way but how the recent series of closes below the trendline has been unable to close back above. This bearish price action suggests that the uptrend is in the process of reversing, and bearish traders will likely use the dotted line as a guide for determine the placement of their stop-loss orders. Based on this chart, it is obvious that the fundamentals within the sector are shifting and that prices could be poised for a long-term move lower. Bulls may want to remain on the sidelines until some of the key technical indicators turn positive again. (For further reading, see: Lagging Lumber Prices Hammer Timber Stocks.)
One of the top holdings of the WOOD ETF that some active traders may want to take a closer look at is PotlatchDeltic. The company owns nearly 2 million acres of timberlands in Alabama, Arkansas, Idaho, Louisiana, Minnesota and Mississippi, and by taking a look at the chart below, you can see that the downward pressure mentioned above is clearly represented. The failed attempt to surpass the nearby resistance put the momentum in the favor of the bears, and the recent break below the 200-day moving average suggests that the long-term uptrend is reversing. Technically speaking, the bearish crossover between the 50-day and 200-day moving averages (blue and red lines, respectively) is known as a death cross and is a popular long-term sell signal. As was mentioned above, active traders will likely want to remain on the sidelines until key indicators start to turn positive again. (For further reading, see: Active Traders Turn Their Attention to Forestry.)
When using trendlines and other technical indicators, it is rare that everything lines up as cleanly as the examples shown above. In most cases, traders have to filter through a broad amount of noise to identify major trend reversals. For example, as you can see from the chart of International Paper, the identified trendline may not be regarded as significant, but when filtered through the broader lens as the one presented above, it could actually be an early signal of a much more significant move lower. Active traders will likely hold a bearish outlook on the stock until the price closes back above the support of the ascending trendline or the 200-day moving average. (For more, see: The Lumber Market Is Starting to Show Cracks.)
The Bottom Line
The global timber and forestry sector has been one of the strongest performers in the commodities market over the past several years. However, given the breaks through key levels of support mentioned above, it appears as though the trend is reversing and that prices could be gearing up for a major move lower. Bulls may want to use these charts as a warning sign and remain on the sidelines until indicators start to turn positive again. (For more, see: Lumber Prices Are Gearing Up for a Pullback.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the securities mentioned.