As we look around the commodity market this week, we're reminded again why it pays the trader to be a "connoisseur of extremes."
Longtime readers know we're always on the hunt for assets in an "extreme" condition. For example, in December 2008, we wrote a bullish note on crude oil, pointing out the extreme reading in the oil/gold ratio.
Gold and oil tend to respond similarly to economic conditions, but the price between the two occasionally gets extremely out of whack. Thanks to worries about a Great Depression Part II back in 2008, oil sold off heavily. This made it incredibly cheap versus gold.
Oil went on to nearly double in price in the next few months… and turned our recommendation of oil-service stocks into a big winner. But as you can see from today's two-year chart, that oil rally stalled out in the $70-$85-per-barrel range… and the fuel is now struggling below its 200-day moving average, a widely used gauge of whether an asset is in a bull trend or bear trend.
Here's the moral of this story: When you're looking for trading ideas, stick with assets in "extreme" conditions… like extremely oversold and cheap, or extremely overbought and expensive. As this example shows, big gains accumulate in a hurry when things get "less extreme" for a given asset. After that, it's a hard dollar…
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