The price of lumber is a key indicator used by investors to determine the strength of certain sectors of the economy such as housing. Data from July revealed that U.S. housing starts surged to an eight-month high. Given the strong correlation between lumber prices and housing starts, traders would expect to see bullish chart patterns developing on the chart of the underlying commodity. Unfortunately, the short-term chart is suggesting the opposite. Any weaker-than-expected housing data over the coming weeks could add to the downward momentum so this is definitely a commodity worth adding to a watch list. (For more, see: Commodities: Lumber.)

As you can see from the spot price of lumber below, the $342 level, shown by the blue dotted line, has acted as a strong level of resistance since late 2013. The proximately of the price to the resistance will be of specific interest to active traders. A break below the swing low of $330.90 will signal a likely move lower. If the declines in other commodities are any suggestion, the coming weeks could prove quite difficult for the lumber bulls. (For more, see: An Introduction to Swing Charting and Support and Resistance Basics.)

MACD Sell Signals

In active trading, one of the most commonly used technical indicators is the MACD. Buy and sell signals are generated when the MACD indicator crosses below its signal line. Strong divergence between the MACD and its signal line is used to suggest that the momentum is increasing. As you can see from the spot price above, the recent cross below the signal line could have been used to identify the swing high. The divergence away from the signal line in the downward direction suggests that momentum is on the side of the bears and that the next stop could be near $320.70. (For more, see: A Primer on the MACD.)

Taking a look at Weyerhaeuser Co. (WY), which has a market cap of $17.5 billion, you’ll find that its chart is suggesting that recent weakness could continue. Notice how the price traded sideways for several weeks and how it was unable to move above the resistance of $34.33. The 1.78% move lower on Sept. 12 coincided with a sell signal on the MACD. Given this short-term sell signal, the next stop would likely be a move toward the ascending trendline, which is currently sitting at $32. A break below the trendline would then suggest that the 200-day moving average would be the next target. When the market leaders in a sector are experiencing downward pressure you can often also expect to a trickle down in smaller players as well. (For more, see: The Utility of Trendlines.)

Plum Creek Timber Co., Inc. (PCL) owns and manages timberlands in the United States. As suggested above, the broad pressure across the sector has indeed started to reveal itself on the chart. As you can see below, the price has recently broken below a very significant level of support (shown by the red circle). The close below the horizontal trendline and the MACD sell signal will be used as confirmation of a move lower. It wouldn’t be surprising to see the bears protect their positions by placing stop-loss orders above the swing high of $41.63. (For more, see: Spotting Trend Reversals with MACD.)

The Bottom Line

Lumber prices have risen in step with strong housing data over the past year, but signs of weakness are starting to show on the charts. As we’ve shown above, the prices of lumber and lumber-related stocks have broken below key levels of resistance. To make matter worse for the bulls, the MACD indicator has fallen below its signal line on each of the charts, which will be used by most active traders as confirmation of a move lower. Price action over the coming weeks will prove critical as to whether the bears remain in control. (For more, see: The Lumber Market Is Starting to Show Cracks.)