Technical Strategy Video (Recorded Wednesday, October 13th):

Builder boom could be kicking back into gear with Lumber breakout

Key Takeaways

  • Home construction and Builder stocks look to be turning back higher, with convincing movement back to new all-time highs in LOW, BLDR, while XHB has stabilized and readying for its own breakout
  • Lumber has shown good correlation with XHB, the Homebuilders ETF in recent years, both having peaked out this past Spring. Lumber now breaking back out higher.
  • Lumber cycles which peaked in the spring now bottom in October and turn higher into December of this year. It’s thought that Builders should benefit from this rally

Stabilization in  XHB (SPDR Trust Homebuilder ETF) which has helped momentum to stabilize a bit has given way to breakouts in the downtrend from the last couple months in many prominent names like Lennar ( LEN 2.08% ) Builders Firstsource ( BLDR -0.42% ) which are both favored in the space. It’s right to position long in XHB technically, looking to add above $74.

Builder boom could be kicking back into gear with Lumber breakout
Source: Trading View

Lumber breakout of its multi-month reversal pattern bodes well for strength

Lumber’s 70%+ decline from May highs finally looks to be turning back higher following this week’s breakout. As seen below, Lumber churned sideways in consolidation after having bottomed out in August. This pattern resembles a reverse Head and Shoulders pattern given the two separate peaks made in July and September near 695. The breakout of this level last week now should turn prices back higher in a bit quicker fashion, and suggests a bounce is underway. Upside targets for Lumber lie at 946, then 1096-1100

Builder boom could be kicking back into gear with Lumber breakout
Source: Trading View

Lumber futures seem to have shown good positive correlation with XHB, the Homebuilders ETF in recent years. Both sold off into late 2018, after having bottomed in 2016, then rallied into February 2020 before peaking. The next selloff into last Spring in Lumber also bottomed at/near where  XHB did and turned back higher. Overall, it’s thought if Lumber makes an above-average bounce into end of year, Homebuilders are likely to follow, particularly given the ongoing low-rate environment.

Lumber vs XHB, Daily chart (2015-2021)

Builder boom could be kicking back into gear with Lumber breakout
Source: Trading View

Cycles show potential for further strength into year-end. My Cycle composite for Lumber which has had a good record of peaking out during the last few intermediate-term turns and bottoming near prior lows since 2018 now shows prices pushing higher into November/early December 2021. It’s likely that this recent spike from recent lows represents the beginning of this rally and should persist in Q4 before weakening in Q1 of 2022.

Builder boom could be kicking back into gear with Lumber breakout
Source: The Foundation for the Study of Cycles

Lowe’s Companies ( LOW 0.63% ) broke back out to new all-time highs on a closing basis Wednesday 10/13 and should be favored for additional strength, along with stocks like Home Depot (HD) which have both formed bullish triangle patterns with LOW having officially made a new all-time high close on Wednesday. My upside technical target for LOW is $225, then $235.

Builder boom could be kicking back into gear with Lumber breakout
Source: Trading View

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