Technician forecasts another 35% rally for lumber – four ways to play higher demand

Lumber prices are on a tear.

The commodity topped $1,000 last week, a record high and a promising sign of a rebound in demand for building materials as the economy recovers from the coronavirus pandemic.

Craig Johnson, chief market technician at Piper Sandler, said the charts forecast even more upside ahead.

"Stay seated, but it looks like you could have 30-35% more upside, based upon the size and technical breadth of this technical setup here for lumber prices. There's no doubt that lumber prices are going higher," Johnson told CNBC's "Trading Nation" on Friday.

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Johnson said three homebuilder companies reporting earnings this week could benefit from increased demand for lumber – Home Depot, Lowe's and Toll Brothers.

"If you look at Home Depot as an example, this is a stock that's been in a downward trending price channel, and it's very close to inflecting and reversing that channel, and starting to take another leg higher. I think that's a stock that will probably have very good results," he said.

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Toll Brothers and Lowe's also look to be on the verge of a breakout after forming solid bases, Johnson added.

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Boris Schlossberg, managing director of FX strategy at BK Asset Management, added another stock play, Lumber Liquidators, to the list of names that may benefit from higher demand. He said secular trends and a more permanent shift to a work-from-home environment could help the group.

"Home Depot and Lowe's are going to be very good long-term holds because the work-from-home phenomenon is not going to stop with Covid," Schlossberg said during the same interview. "If Lowe's and Depot report well, you could have a sympathy rally in Lumber Liquidators, which has done really well."

Schlossberg added that these companies could see margin pressure tied to the higher cost of lumber, though he contends the potential upside outweighs that risk.

Home Depot and Toll Brothers are set to report on Tuesday and Lowe's on Wednesday. Lumber Liquidators is scheduled for March 2.

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