Rather than relying solely on government-supplied measures of inflation, I’ve long watched relative strength ratios to determine whether inflation or deflation is the dominant force du jour.

As I’ve shared with you before, most commodity markets – corn, wheat, crude oil, etc. – clearly point to deflationary headwinds, with downward-trending ratios.

The gasoline-to-Treasurys ratio has bucked that trend, showing a rising trend indicative of inflationary pressures since 2009. Although recently, I noticed the trend in that ratio was weakening and I shared the following chart with you:

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There are, of course, two ways to interpret gasoline’s persistent rise, relative to the falling prices of most other commodity markets. Either gasoline is “right,” and all other commodity markets will eventually shoot higher to join gasoline’s trend. Or, gasoline is “wrong,” and will soon crack lower, joining the deflationary trends evident in the crude oil and agriculture markets.

Personally, I think gasoline, over the long run, is susceptible to a significant drop… to as low as $1.20 wholesale prices! Don’t expect to see this price at the pump! Here’s why I’m on watch for lower gas prices…

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While gasoline futures prices have continued higher, the Relative Strength Index (RSI) began trending down in early 2011. This is a classic example of negative divergence and an early warning signal that gasoline’s bull market is weakening.

I’m watching for a break below $2.50 in gasoline futures, at which point a fast drop could ensue. It’s too early to make the call, but I’ll keep a close eye on this market as I suspect it will soon confirm the deflationary forces I’m seeing in most other commodity markets.

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Adam O'Dell
Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.