All good things must come to an end, and for traders holding short positions in Lumber futures, the end came on Friday when the most active March contract ended the day locked limit-up. Lumber futures have been the poster child for the economic recession, as the collapse in the U.S. Housing market coupled with weak credit conditions caused Lumber prices to plunge to lows not seen in over 20 years. However on Thursday, an announcement by mill operator West Fraser that it was planning a lengthy shutdown at its mill spurred short-covering buying that overwhelmed what sell orders were out there. The move higher also came after prices fell to contract lows on Thursday, on higher than average volume, which some technical traders believe might be a sign of capitulation by weak longs, which could signal the bear market may be coming to an end. Cash-connected traders reported that producers were hesitant to sell on Friday, as they were expecting higher bids on Monday due to the rising futures market. Not even Monday's release of a "bearish " U.S. construction spending report for December(down 1.4%) was enough to keep Lumber futures from trading limit-up for the second straight session in the March contract. A look at the most recent Commitment of Traders report shows that both large and small speculators are holding a net-short position in lumber futures, with large speculators net-short 1,683 contracts as of January 27th. The Lumber market is notorious for bouts of illiquidity, especially if major market news comes out. Multiple "limit" days are not uncommon, especially if speculators are mainly on one side of the market. Spread traders have noted that the wide contango Lumber prices have been in has started to narrow, as the lack of producer selling has forced traders to bid-up nearby contracts.
Looking at the daily chart for March Lumber, we notice the sharp reversal in prices after Thursday's close at a new contract low of $137.90. Should this major low hold, a potential "V" bottom pattern may be forming. Prices are now approaching the widely watched 20-day moving average, currently near the $163.00 area, which if broken, may spur a new wave of buying by short-term momentum traders. The recent lows at 137.90 should act as major support for March Lumber, with major resistance found at the recent highs made on December 19th at $203.00.
Mike Zarembski, Senior Commodity Analyst