Lumber company Louisiana-Pacific Corp. ( LPX) gapped sharply higher Tuesday on the heels of news that legendary investor Warren Buffett had bought a reportable stake in the firm.
Let’s check out the charts of LPX and check the pulse of lumber futures and one other lumber leader.
In this daily bar of LPX, below, we can see that the shares made lows in June, September and early November. The shares traded around the 50-day moving average line the past five months or so but today we can see that prices gapped above the bottoming 200-day line. Impressive strength.
Trading volume increased at the June and September lows. The On-Balance-Volume (OBV) line declined to lows in September and November but amazingly has not shown us a rise of importance. Buffett has been able to accumulate shares on available weakness — good trading desk earning its keep.
The Moving Average Convergence Divergence (MACD) oscillator made a higher low in September versus June even though prices made a lower low. This is a bullish divergence and a bullish signal. Hindsight is amazing.
In this weekly Japanese candlestick chart of LPX, below, we can see a bottom-reversal pattern (with the help of hindsight) at the last week of October and first week of November — a large bullish engulfing pattern. Prices are now trading above the declining 40-week moving average line.
The weekly OBV line is neutral. The MACD oscillator gave a cover shorts buy signal in October.
In this daily Point and Figure chart of LPX, below, we can see Tuesday’s rally with no price gap. Here the software projects a price target in the $76 area.
In this weekly Point and Figure chart of LPX, below, we can see a potential longer-term price objective in the $97 area.
In this weekly bar chart of the nearby lumber future (continuation contract), below, we can see the big up-and-down swings in price. Prices may be bottoming now but it is early in the scheme of things. Buffett’s team is obviously looking ahead to better supply/demand conditions than we currently see.
In this daily bar chart of West Fraser Timber ( WFG) we present another name in the lumber industry. Prices have been finding buying interest around $70 for several months. The $70-$100 sideways trading pattern could be a very bullish consolidation pattern if and when there is an upside breakout. I wonder if Buffett considered WFG before buying into LPX?
Bottom-line strategy: Shares of LPX are up sharply from Monday’s close but they are off their best levels Tuesday. This subtle price action tells me that LPX could pull back and fill the gap made on the opening. A pullback to the $60 area is a better place to start to build a long position. Patience.