04.13.2022
We all know how strong many commodities have been over the last year. If you have been smart and nimble enough to capture these gains, or even if you have missed out thus far, this chart will be helpful to you stay on the right side of this trade.
In the chart below, the top panel shows a monthly line chart of the Commodity Research Bureau Index, the CRB, with an 18-month exponential moving average (ema). This represents the global commodity markets because the CRB has an allocation to energy, agriculture, precious and industrial metals.
The middle panel shows a ratio of the CRB to the price of 30-year US Treasury Bonds. The distinguished technician, Martin Pring, describes this relationship as an accurate gauge of the inflationary environment. When the ratio is rising, showing demand for commodities over bonds, this is a sign of an inflationary environment. When the ratio is falling, showing demand for bonds of commodities, this is a sign of a deflationary environment.
The bottom panel shows an 18-month Rate-of-Change, an indicator that uses percentage change to show momentum, of the commodity to bond price ratio. I have also marked an upper boundary of +40% and a low boundary of -25%.
Click Chart To Enlarge.
So what? Why should I care about this chart? How will this chart help me make money? The answer is, since 1996, for the last 26 years, the middle panel, the ratio of the CRB to 30-year bond prices, when coupled with readings from its ROC has successfully marked turning points in the inflationary environment. These turning points can help guide your investment decisions.
Condition A. The ratio, middle panel, closes above its 18ema and its ROC, bottom
panel, has fallen to at least -25. This potentially signals an inflationary
environment ahead. Marked on the chart with a vertical green line.
Condition B. The ratio, middle panel, closes below its 18ema and its ROC, bottom
panel, has risen to at least +40. This potentially signals a deflationary
environment ahead. Marked on the chart with a vertical red line.
There is no way to know if this current commodity bull market will last for weeks, or months, or even years. However, knowing where this ratio closes in relation to its 18-month ema, considering the potential for whipsaw, and knowing where its 18 ROC is should help you label the current environment as inflationary or deflationary.
The conclusion is this:
Look for long opportunities when the ratio closes above its 18-month ema after its ROC has fallen to at least -25.
Look for short opportunities when this ratio closes below its 18-month ema after its ROC has risen to at least +40%.
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