Commodities have been smothered for years. I think the best way to play them is to enter near the bottom - with tight stops - and subsequently ride out the runs. When they top out, step aside as they pull back. We can use indicators to help us find setups. There is no guarantee that we'll have found the final low, but, remember, our stops can also be tight.
This week, the lumber-related stocks are trying to rally.
Here is the chart of Lumber. The Full Stochastic has given a buy signal this week and the PPO is close to giving a signal as well. I do like the positive divergence on the PPO compared to the price. While price made a lower low, the PPO is making a significantly higher low, which is commonly seen on final bottoms.
With the underlying product as an anchor, a few of the lumber-related names have started to surge. Norbord, the maker of the Oriented Strand Board (which is the reason the ticker symbol is OSB), can be seen with huge price waves on the chart below. The Full Stochastic indicator has turned up, giving us a signal. The PPO has not turned up yet, but that would be the second signal. I would like to see the trend line on the PPO broken soon, but this current setup makes for a nice entry. We can set our stop below the last low and move it up as price responds.
Another way to play the group is through the WOOD ETF, where we can see similar clues of a nice place to enter.
Another week, another place to look for more improvements in the commodities. The lumber-related trade looks nice here.
Good trading,
Greg Schnell, CMT, MFTA
Senior Technical Analyst, StockCharts.com
Author, Stock Charts For Dummies
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