Friday, July 11, 2014

CRB Commodities Daily Chart at Gap Support Signals Disinflation Lower Band Violation Sideways Channel Island Reversal

The weakness in commodities over the last couple weeks is the cause of the market selling off the top a few days ago. The CRB has collapsed from 313 to 300, -4.2%, in only nine days. The DBA (ag) is down sharply but the DBB (metals) is up. The drastic drop in wheat and corn prices weighing on commodities overall. Note how price pauses at the gap from February. If price would immediately collapse to 298 and lower the action would create an island reversal pattern (price sits on an island above 299 ever since February). The sideways channel through 299-313 remains in play. Bulls win above 313. Bears win below 299.

If the 299 fails and price drops under the gap the 284-288 landing zone is in play. Price has violated the lower pink band at 300 so a move back up to the middle band, at a minimum, at 308-ish would be expected. The 305-310 area remains in play as resistance. The ADX remains subdued over the last couple weeks verifying that there is no trend in place. Commodities are simply staggering sideways like the town drunk.

The red lines show the weak and bleak nature of the indicators so lower lows in price are desired. The lower band violation and oversold stochatics and RSI, however, will help create a recovery bounce first. Keystone uses the CRB in the numerator of his Inflation-Deflation Indicator; CRB/10-yr price. Thus, 299.7/99.8125 = 3.00 exactly on the disinflation line. Below 2.90 is deflation. Between 2.90 and 3.00 is disinflation. Between 3.00 and 3.70 is no man's land with deflationists and inflationists fighting it out. Above 3.70 is inflation. Over recent weeks, the indicator has been creeping higher to 3.05 and near 3.10 (as the CRB climbed) but with the drastic drop in CRB the inflation worries are further eased. Keystone agrees with Fed Chair Yellen on only one thing and that is that deflation remains a concern. The consensus across markets right now is that the Fed is behind the curve and the ramp up in inflation recently proves that the Fed must act to raise rates sooner than expected. The consensus expecting inflation likely remains too early still yet.

Wages remain flat and inflation will not occur without higher wages. Computers and technology continues to take over lower-paying factory as well as other jobs. Computers are deflationary machines. The food inflation worries are subsiding as the chart above shows. Corn and wheat prices are down sharply. Beef herds are increasing again after the culling last year due to drought conditions and by the Fall and especially early next year the steaks will be in the family budget and grilling weekly again.

A further drop in CRB will send the economy firmly into disinflation again. The denominator of the inflation-deflation gauge is the 10-year Treasury price (prices move inverse of yields). So as the 10-year yield drops, price moves higher, and the indicator number will move lower so pay attention to the action in Treasury yields. The economy remains in a sick stagnant disinflationary funk. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.

Note Added 7:03 AM on 7/12/14: The CRB collapses further dumping another -0.9% on Friday to 297.07. Price fills the gap from February creating a solid red down candlestick which does not create an island reversal. Support from February at 293 and the 200-day MA at 293.72 create a potential landing area for price and may serve as a magnet. Updating Keystone's Inflation-Deflation gauge yields 297.07/99.8594 = 2.97; firmly indicating the US economy in Disinflation currently. The 10-year Treasury yield is 2.52% with the 99.8594 price.

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