LEONARD LUMBER REPORT: Fifty dollars in five days. Lumber futures gave it all back.

Fifty dollars in five days. Lumber futures gave it all back.

While there was weakness in the cash market, it was nowhere near that severe. There were many combinations of players involved, but at the end of the day it was the algo-driven push that unraveled the move. That forced the longs out and brought the industry in.

The Commitment of Traders report adds another layer of confusion, as it shows funds getting longer. The issue is that the data only runs through Tuesday, so it does not yet provide a complete picture of the market’s current makeup.

To keep it simple, this appears to be some type of computerized trade. The larger the bid in the deck, the faster the system reacts to selling it. That is not a typical lumber trader. 

One thing worth noting is that, just as with the previous rally, the computer-generated activity creates a great deal of air in its wake.

As I mentioned earlier in the week, whatever the reason, at these levels does the market present opportunity?

The mortgage rate creep can’t be discounted using the supply excuse. I was just bragging about it headed lower. With this back and forth, I would not expect the builders to deviate in the second haft from their original construction plans. 

It’s no surprise that the technical read turned negative. The tradable factor is that the market remains in the uptrend that began last November. That trendline currently comes in at 581.20, leaving plenty of room from today’s levels.

The negative is that the stochastics crossed lower on the weekly chart last week. Once that signal changes direction, it tends to remain in place for several weeks. The last crossover occurred in late May and was to the upside.

With the daily RSI at 26%, some back-and-forth trade would not be surprising. Longer term, the major support areas continue to be 618, 600, and 580.

The computer-driven selling pushed the market through 618 as if it were not even there. If the algo influence fades, attention will likely shift back to the 200-day moving average, which currently sits at 636.10. That level could quickly become an important reference point for both traders and the industry.

The bigger question remains whether the recent selloff has created opportunity or simply reset expectations after an extended rally. The answer will likely depend on whether the market can stabilize above key support levels and whether the cash market begins to confirm the futures action.