GBPUSD: measuring the brutality of the sell-off

GBPUSD has reached momentum in this sell-off that has only been achieved 3 other times in the last 15 years. Do those instances provide any roadmap from here?

Looking at the GBPUSD chart today and the various indicators had me posing the question – what has happened from this point on during the few remarkable occasions when the 9-day RSI has either reached above 88 or below 12? Surely, at these levels, the terms overbought and oversold actually mean something?

Here’s what I found: just like any other random entry point, there is nothing to indicate there is something called oversold or overbought. Yes, there are instances where such extremes proved to be close to a near term extreme that then yielded to a large move the other way, but there is equal evidence (particularly in panicky markets like the one we have now – take the late 2008 examples below to heart) where there was either significant further immediate selling, or only a small rally before a further meltdown. That’s a fancy way of saying: trying to catch a falling knife is dangerous business – you might get your timing right and look impressive, or you might get sliced to bits trying…
Stay careful out there.

RSI-9 below 12

• 13 August 2008 - sold off another 200 pips, then only managed to rally to about 90 pips above the close on the 13th before selling off another -1300 pips (which was the next episode below)
• 1 September 2008 - sold off another 500 pips before finally reaching bottom, from where it saw a 1200-pip rally
• 27 October 2008 - sold off a tiny bit the next day before impressive 1100-pip rally over just a few days

 RSI-9 above 88

• June 2003 - rallied another 300 ips before selling off only 220 from the highs, which then yielded to +700 pips more rallying
• January 2004 - rallied another 360 pips before selling off 750 pips over a protacted period
• December 2004 - rallied another 160 pips before yielding to 500+ pip sell-off
• May 2006 - rallied another 400+ pips before selling off 1000 pips or so
• July 2007 - rallied another 120 pips before selling off 480 pips
• June 2009 - rallied about 70 pips before quick 700 pips sell-off