The Inflation/Deflation Barometer

One of the biggest questions investors have is what type of environment are stocks and the economy in, deflation or inflation? Knowing the answer to that question can give you a heads up on what different sectors to invest in and what sectors to stay away from. I would like to update some of the different commodities indexes to see if they can give us any clues on which way the deflationary or inflationary pendulum is swinging. Commodities are often an under analysed asset class as compared to Stocks and Bonds. However they are the nuts and bolts , the real stuff supporting human existence.

Lets start with one of the oldest commodities indexes around the $CRB index. After the huge impulse move down that began in the middle of 2014, the CRB index finally bottomed in early 2016, putting in a small double bottom which was going to be part of a bigger inverse H&S bottom. After breaking out above NL1 the CRB index then rallied higher stalling out below the 2016 high and began to decline once more. That decline found support at the neckline symmetry line which was a good place to look for a low for the right shoulder of a much bigger double H&S bottom. After trading below NL2 for six months the price action finally broke above it with just a small rally.

From a Chartology perspective nothing is broken yet on the double H&S bottom, but the price action has been very laborious since the December low of last year. Again, nothing is broken, but I see a yellow flag waving that is signaling caution in regards to the double H&S bottom, which we’ll look at in more detail on the next chart to follow this one.

Whenever a breakout becomes very laborious it can be a sign of a failing pattern, not always, but sometimes, so it’s important to pay close attention. This second chart shows the price action from the 2016 low with a possible ascending triangle building out. Note the price action at reversal point #4 in which the CRB index went nowhere since December. Last week the price action broke below the black dashed trendline and found support on the bottom rail of the black triangle last Friday and got a bounce. Now we have a support line at 188.79 with a resistance line just above at 191.50 which is the the black dashed S&R line or NL of a small H&S top. The price is converging into a very tight range which will show us which way the CRB index wants to go depending onwhich direction the breakout occurs.