As a matter of practice, when an instrument gets either overbought or oversold, I like to wait for a mean reversion signal into a neutral before taking action. Overbought stocks can get even more overbought and oversold stocks can get even more oversold. When I wrote that the US dollar, which is inversely correlated to commodity prices, was overbought on September 17, 2014 (see Overbought USD = Commodities poised to rally), I never dreamed that it would take this long to work off the overbought condition in the USD Index. As the chart below shows, the 14 week RSI of the USD Index reached 70.16 at the close on Tuesday, which is just above the 70 overbought threshold condition for taking action to sell the USD and tactically buy the commodity complex.
In addition, I marked past instances when the RSI reading rolled over from an
While we can look back to the 2008 global financial market meltdown and cite any number of warning signs that became so painfully obvious in hindsight. Perhaps the clearest warning sign that trouble was just around the corner began in July of 2008 when virtually all commodities entered into a steep tailspin which they would not pull out of for at least another 8 months:
(click to enlarge)
Platinum (top), WTI crude oil (center), and copper (bottom) offer a sampling of the steep downside reversals that commodities as a group suffered beginning in July 2008.
Perhaps what was most interesting about the commodities collapse of summer 2008 was the consistent commentary that the bullish thesis for commodities (China, BRICs, global growth, etc.) was still very much intact even as prices continued to tumble. As it turned out the commodities meltdown foreshadowed much deeper problems in the global financial system which