On Friday, the CPI numbers were reported, showing that, while the Fed has continued to increase rates, inflation has again pushed higher. This worsens investor sentiment and increases fears that a recession is inbound. This was reflected in the stock market as the major indices broke down.

However, increased inflation, rising prices, and more economic struggle have been something we warned investors of for many months at this point. This ties into stagflation and is why we have kept a keen eye on commodities.

One of the Economic Family members that are very important for watching demand is the Transportation ETF (IYT). If economic growth is going to continue to slow, watch for IYT to continue lower. Although IYT is sitting in support from recent lower, it can easily break down further.

Other weak members with the same pattern include the semiconductors (SMH) and the regional banking (KRE). Their nearby support levels should also be watched if the market is looking continue with Friday's price action. However, the Russell 2000 (IWM), as the Granddad of the Family, still has a little buffer from support around $171. This makes for a tricky trading area for anyone wanting to look for further market breakdown.

What we suggest is that, if you haven't already gone short (taken a counter-trend trade) and are looking to, you will need to be careful of the current price area, which has yet to fully break down. The support levels/areas can be seen as black lines in the above charts. With that said, with higher inflation, we can turn our attention over to commodity plays.

Coming into this year, commodities were at a 100-year low versus equities. This suggests that a commodity-based super cycle is on the way. Looking at longer-term weekly charts, let's scan through soft commodities, oil, and precious metals.

The above image shows weekly charts of the Agricultural Fund (DBA), United States Oil (USO), Silver (SLV) and Gold (GLD). They are all accompanied by their 50 (blue) and 200 (green) week moving averages.

With rising food prices DBA has been able to maintain a consistent upward trend. Additionally, with prices and shipping still under pressure as we can see from IYT, DBA has much more room to grow. Notice that DBA only recently crossed into a bullish phase when its 50-DMA cleared its 200-DMA in mid-2021.

With gas prices at record levels, U.S oil is only sitting near its pre-pandemic high. This shows that oil prices could continue upward amid shortages and supply issues.

Moving onto the precious metals, both silver and gold have endured a stagnant period of growth. However, if fears of a recession continue to grow, both symbols should be on everyone's watchlist, as they are currently undervalued compared to equities. Both are interesting if SLV can clear $22 and GLD holds its 50-DMA at $171.43. However, patience is key when looking for setups, especially for symbols that have been rangebound like GLD and SLV.

While these are weekly charts, they give a great perspective of the continuing trend and a possible shift, as more traders figure out that our economic situation has more challenges ahead. Moreover, while we are looking at the longer-term picture, we will continue to write about and look for short-term trade setups as these key areas evolve.

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ETF Summary

• S&P 500 (SPY): 390 next support area.
• Russell 2000 (IWM): 171 next support area.
• Dow (DIA): 306 low to watch.
• Nasdaq (QQQ): 280 next support low.
• KRE (Regional Banks): 58 next level to watch for support.
• SMH (Semiconductors): 215 key support. 
• IYT (Transportation): Sitting at pivotal price level.
• IBB (Biotechnology): Next main support 105 area.
• XRT (Retail): Watch to hold current price area, since major support far away at 58.

Forrest Crist-Ruiz

MarketGauge.com

Assistant Director of Trading Research and Education