The break below key levels of support earlier this year on the charts from across key segments of commodities such as forestry products and basic materials has dominated the attention of active traders, but as of late, it appears as though the story is now changing. In the paragraphs below, we'll take a look at the status of the relative strength index (RSI) and discuss why it is suggesting that the sell-off could be nearing completion and how prices could be poised for a bounce heading into 2019.
Looking back on the chart of the iShares Global Timber & Forestry ETF, it may seem as though it was obvious that the break below the long-term trendline was pointing to a move lower. While it is true that the conviction of the bears has become stronger over the past couple of weeks, the sharp decline has pushed the RSI reading well into oversold territory and is now suggesting that a bounce higher could be in the cards. Bullish traders will likely want to remain on the sidelines and watch for the RSI to cross above 30, which will confirm that the forestry sector is coming out of oversold territory and on the move higher. Target prices will likely be set near the resistance of the 50-day or 200-day moving averages at $75.65 or $76.97, respectively, depending on risk tolerance.
Another commodities-related exchange-traded fund that active traders will want to keep an eye on is the Invesco MSCI Global Timber ETF. The sharp drop over the past several weeks has pushed the RSI indicator into severely oversold territory (shown by the blue circle), which suggests that a move toward the resistance of the long-term moving averages near $32 could be possible over the weeks ahead.
The failed break out of an ascending triangle pattern on the chart of the Materials Select Sector SPDR Fund quickly revealed to the market that the bears were in control of the short-term direction. From a technical perspective, the move lower that occurred on the break below $58.75 was to be expected. However, for many traders, the pace at which the sell-off occurred was unexpected. As discussed above, the sharp sell-off over the past couple of weeks has pushed the RSI into oversold territory and suggests that we could see a bounce higher in the remaining months of 2018.
The Bottom Line
Drastic sell-offs across the forestry and basic materials sector have pushed the RSI indicator into oversold territory. While the breaks below key ascending trendlines pointed to lower prices, the rate of the move has been faster than many were expecting, which suggests that a bounce into the final months of 2018 could be in the cards.
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the securities mentioned.