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Is Deflation Coming?

Published 03/20/2023, 03:35 AM
Updated 07/09/2023, 06:31 AM

On Thursday’s, Markets Update, I mentioned that I was beginning to see some possible signs of deflation creeping into the the Inflation / Deflation debate. I know this doesn’t make any sense right now with all the talk going about getting inflation under control, but most of the commodity charts I follow are showing some technical damage with last Wednesday’s price action showing some commodity indexes gapping below short term support.

The energy complex in general has really decayed over the last month or two and is now showing signs of breaking down in a more pronounced manner. This is taking place on the short and long term charts. There are many charts tonight so I won’t go into great detail explaining what the charts are strongly suggesting. Most are pretty self explanatory.

Lets start with the energy complex and look at a daily chart for the WisdomTree Enhanced Commodity UCITS ETF - USD Acc (SG:WTIC). Last week the price action broke below the neckline of the H&S consolidation pattern with a backtest possible.

WTIC Daily Chart

This longer-term weekly line chart shows a much bigger double H&S top, with the neckline giving way last week.

WTIC Weekly Chart

The top rail of the 2008 expanding falling wedge should have held support on this backtest, but it is failing.

WTIC Monthly Chart

Below is a daily chart for the ARCA Oil, big cap oil stocks, which broke below the bottom rail of its June 2022 rising wedge three weeks ago with a backtest last week.

XOI Daily Chart

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The longer term weekly chart for the XOI.

XOI Weekly Chart

I posted this quarterly chart for the XOI last year when it attempted to break out from that massive expanding triangle. At a minimum, we should see a ping-pong move between the top rail of the black expanding triangle and the top rail of the blue expanding falling wedge.

XOI Quarterly Chart

I also posted this long-term month combo chart for some of the large-cap oil stocks, which were pushing into new all-time high territory. As you can see, they are now beginning to roll over with Occidental Petroleum Corporation (NYSE:OXY) showing a nice tight reversal pattern at its all time high.

XOI Monthly Chart

GASO had a massive run out of its 2020 crash low, just like everything else related to the markets. It appears to be forming a H&S top with the possible right shoulder under construction.

GASO Monthly Chart

Last week the USO (NYSE:USO) broke below the bottom rail of the bearish falling wedge reversal pattern.

USO Weekly Chart

The Invesco DB Energy Fund (NYSE:DBE) is an energy fund that gapped below the bottom rail of its June 2022 falling wedge.

DBE Daily Chart

This weekly chart puts that falling wedge in perspective.

DBE Weekly Chart

This next chart is an old combo chart I built years ago just to track some oil stocks. Until fairly recently I was looking at those blue trading ranges as consolidation patterns to the upside.

Over the last several weeks they now appear to be reversal patterns that are just starting to break down. There are some old necklines that may offer support down the road.

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BTE Weekly Chart

Let’s now look at some commodity indexes starting with the CRB index. As you can see it has a similar blue falling wedge to some of the energy indexes above. Last week the price action took out the bottom trendline.

CRB Weekly Chart

The Invesco DB Commodity Index Tracking Fund (NYSE:DBC) is a more liquid commodity index which formed a breakout gap below the bottom rail of its falling wedge last week.

DBC Daily Chart

Here again, I was looking at the blue trading range to possibly develop into some type of consolidation pattern, but that seems to be fading.

Note how fast the decline in 2008 and again during the 2014 commodities crash formed a sting of black candlesticks all in a row. The opposite happened during the 2020 rally to the 2022 high, with mostly white candlesticks forming.

DBC Monthly Chart

GNX commodity index had a massive move out of its 2020 crash low with the top rail of the black falling wedge being the first area to look for support.

GNX Monthly Chart

Another commodity index that is widely followed is the iPath® Bloomberg Commodity Index Total Return(SM) ETN (NYSE:DJP) which gapped below the bottom rail of its bearish falling wedge last week.

DJP Daily Chart

This weekly chart shows how the falling wedge looks on the bigger timeframe.

DJP Weekly Chart

Steel has been one of the strongest areas in the commodities complex. The VanEck Steel ETF (NYSE:SLX) shows it may be completing the last reversal point in its expanding triangle.

SLX Weekly Chart

Lumber just closed at a new all-time low.

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LL Monthly Chart

Global X Uranium ETF (NYSE:URA) is attempting to break the neckline of an unbalanced H&S top.

URA Weekly Chart

REMX, rare earth etf, broke below the bottom rail of its blue 5 point rising wedge reversal pattern in 2022 and now is making a new lower low this month.

REMX Monthly Chart

Global X Lithium & Battery Tech ETF (NYSE:LIT) looks to have completed the breaking out and backtesting process and is getting very close to making a new lower low.

LIT Monthly Chart

After a massive run out of its 2020 crash low, Copper built out a one-year H&S top with the backtest forming the blue expanding rising wedge.

Copper Weekly Chart

Below is the combo chart, which has the TIP: iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) ratio on top with the CRB index below it with the GDX (NYSE:GDX) on the bottom. I use the ratio chart on top to help me gauge whether inflation or deflation is has the upper hand. As you can see from the 2011 high to the 2020 crash low deflation held the upper hand. Since the 2020 low inflation took hold with that massive rally.

This is one of those “WHAT IF” moments. What if the current H&S top plays out to the downside? As you can see the rally leading up into the possible H&S was pretty vertical, which means if the price action turns down, we could see some reverse symmetry over the same area on the way up.

The CRB index made a new lower low last week, but the GDX is attempting to make a higher low if it can take out that previous high.

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While everyone is debating how high inflation will go, Chartology strongly suggests how low inflation could go.

TIP/TLT Weekly Chart

This last chart for tonight shows what happens when the Yield Curve becomes inverted. The brown-shaded S&R zones show when the ratio dropped below the zero line and then rallied back above it.

As you can see, the big declines really took hold after the ratio moved back above the zero line, as shown by the black arrows. The current inversion is still well below the zero line but is beginning to turn up. Will this time be different when the ratio trades back above the zero line and the SPX rallies instead of declining?

The markets are always right and can do whatever they want. Are the charts above showing us we are about to see some weakness in the economy and maybe even a recession? As they say, we’ll know in the fullness of time. All the best…Rambus (NASDAQ:RMBS)

YC2YR Weekly Chart

Latest comments

Thoughtful and well supported analysis. Thank you.
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