Lumber production in Canada fell 5.8 percent in November from October, the government said last month. Increased demand in the U.S. and China , combined with lower output, led to higher prices, Larry Hughes, the chief financial officer of Vancouver-based West Fraser Timber Co. Ltd., said in a telephone interview.

What really drives the market is the expectation in terms of U.S. housing? Hughes said. China has been a huge growth story. It's a very strong market for the western Canadian lumber industry. Now, we're in a situation where inventories are very tight, so it doesn't seem to take much to move the needle?

Eoin Treacy's view Lumber pricing is subject to a high degree of volatility but despite some fairly wide swings a progression of higher major reaction lows has been evident since October 2011. Prices found support in the region of the 200-day MA in September and rallied impressively both during and especially after hurricane Sandy as demand for timber increased. A US housing market where home starts are recovering coupled with increasing demand for timber from China are both positives for the sector. A sustained move below $340 would be required to question medium-term scope for continued upside.

West Fraser Timber has been among the better performing timber companies over the last couple of months and while it continues to hold a progression of higher reaction lows, it is becoming increasingly overextended relative to the 200-day MA. A sustained move below C$78 would be required to check the consistency of the short –term advance.

Among US listed timber REITS Weyerhaeuser has a similar pattern to lumber above. Both Potlatch and Plum Creek completed multi-year consolidations in January and continue to extend their respective breakouts. While they are becoming somewhat overbought in the short-term, sustained moves below their 200-day MAs would be required to question medium-term recovery potential. Rayonier remains in a medium-term uptrend. While somewhat overbought in the very short term, a sustained move below $50 would be required to begin to question the consistency of the overall advance.

Universal Forest Products Inc manufacturers timber products rather than owning forests and has held a progression of higher major reaction lows since 2011. It is currently testing the $40 area which represents the upper side of the 5-year base and a sustained move below $33 would be required to question medium-term scope for continued upside. Elsewhere in the forest products sector Louisiana Pacific Corp, Norbord and Canfor Corp have rallied particularly impressively over the last few months but are becoming increasingly susceptible to mean reversion.