The deflationists are looking for a secondary collapse wave beginning this summer. One of the key signs will be the price of Oil. The price of Oil is certainly not the be-all of the deflationary argument though. After all, the price of Oil is meddled and fixed partly by the cartel of OPEC. However, many of the economic fundamentals do come out via the price of Oil.
Lets take a look at three of the main cycles, which should provide a good overview of where we have come from, where we are, and where we might be going.
WTIC, monthly, 20yr historic
The deflationists should be looking for a key break of the $80 level. It is a very important trend line stretching back to summer 2009.
A fail to hold above $80, with 2 or 3 successive daily closes below, will open up the first target of $60. Secondary target is $50 - a hugely massive psychological/natural support level.
The move lower would probably be very fast, spanning no more than a few months.
The big $50
I can't imagine WTIC below $50 this year..or even next year, even if the market collapsed to sp'800, and the USA was officially in recession again. Not only would OPEC fight against any prices drops all the way down, but there are the usual 'middle east tensions' that always help to instill some fear amongst the Oil traders.
Near term outlook
I'm looking for a move higher next week for Oil, a target range of $88/92 looks very reasonable. My best guess would be we max out around 89/90 - the weekly 10MA will offer some strong resistance around the $90 level. Only if Oil re-takes the big $100 level would I get bullish on both Oil, and the wider equity/commodity markets.
Certainly, today ended turbulently...I'm sure Friday - 'Quadruple Witching', will be just as dynamic.
Goodnight from London