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I've been watching lumber with great interest lately, as it has completed a parabolic move and might be a good long-term fade at some point. Still gathering information and thought I'd start a topic here.
In studying past parabolic moves (Silver in 2011, Nasdaq in 2000, Shanghai Comp 2008 etc.) my general observation has been that, while it's very dangerous to try to pick a top, there might be very good opportunities to fade a retrace after the initial break.
What often seems to happen in these large parabolic moves is that prices reach absurd levels, then break hard once the last remaining buyer is squeezed / forced in. But after the initial break, prices often start to retrace higher once some kind of discernible support is established. This is probably fueled by speculators who missed the initial move but still want to believe.
The retrace can take days, weeks, or months to unfold but is eventually met with eager sellers. In commodities, these eager sellers are often the producers who rampled up production during the parabolic phase in order to capitalize on the huge margins.
Lumber is an excellent candidate for such a play. The parabolic move appears complete. The hard break from 840 saw multiple consecutive limit-down days and it now appears to be searching for that initial support. If a retrace happens, I will be looking for an opportunity to build a swing short. The big lumber companies are probably busy harvesting more trees as we speak, and will probably have the train cars filled and ready to go in short order.
But in certain regards this lumber move also reminds me a bit of the big cotton squeeze in 2011, which I think was probably a bit harder to trade as it was more of a corner than anything else. So again I'd love to hear other traders' thoughts on lumber here, especially as it pertains to the primary drivers of the initial move.
General observations about major parabolic moves and how to trade them are also welcome.
Correct. The multiple consecutive limit-down days I mentioned above are testament to lumber's liquidity issues. And this wouldn't be my first time trading lumber either. But I'm not talking about scalping this thing. The scenario I'm describing typically plays out over the course of several months, covering a range of hundreds of points, where friction is only a very minor concern.
Again, any insight on the conditions contributing to lumber's recent rise, or trading major parabolic moves in general, are very much appreciated.
OK I get it no one cares about lumber BUT, I still think it's an interesting story for futures traders
I had mentioned earlier that it reminded me a bit of the cotton market in 2011 and that appears even more the case now. The September lumber contract just traded 1000 while November trades 670, and most of the OI has already rolled. This strongly appears as though one or more participants are getting squeezed for deliverables. Kind of the opposite of what happened in crude this spring.
As Kevin pointed out, trading is very thin. Open interest for all contracts is only 3500 cars and volumes for the September contract are currently extremely low. Single prints moving price 10, 15, or 25 points at a time. Still, it makes for an interesting case study.
Trading in the September contract terminates today at 12:05 CT, at which point the squeeze on deliverables might be done. I am still considering selling one or two November contracts short for a long term swing depending on how things shake out and will post here if I do.
Again, whenever there is a major parabolic move going into contract expiration, history suggests there's an excellent opportunity to fade the extremes on a daily / weekly time horizon. Selling cotton in the summer of 2011 or buying crude this spring are excellent examples.
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I met a trader from a major lumber trader desk (pretty sure it was Koch Pulp & Paper but can't remember their name) a few years back at an Industry event (probably hosted by ICE, TT or an FCM). I'm always on the hunt for potential markets to look at, and am always interested in learning something new, so I engaged him and we had an interesting conversation. I wish I could remember more of it now but I do remember that the space is dominated by a few large players, that liquidity is very thin, and that I decided it was definitely not something I was going to touch! Sorry I know that's of little help, but I would reiterate Kevin's comment, to be careful.
BUT, I still think it's an interesting story for futures traders