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March 25, 2010

Gold Panic

Equities got hit with their second significant reversal in five sessions as the news rally highs set early in the day rejected prices and sent stocks to close near the session low. Stocks are due for a pull-back, and today's reversal likely marks the initial descent.

S&P 500 correction

The dollar was once again stronger today and is in the midst of its third leg up for the rally out of last year.

U.S. Dollar rally

Should this third leg up behave in similar fashion, we would have a 5-wave advance ending at approximately DX 84 within two weeks. A more significant decline should follow and spur a blow-off top for the equity rally and a solid advance for precious metals. However, I do not think a stronger dollar is a significant factor in the impending equity correction. That dubious honor belongs to the bond market, which has tanked this week and sent the 10-year Treasury rate soaring 22bp in two days.

10-year treasury note yield

Rising rates will pressure stocks both directly (as the hurdle rate increases) and indirectly (as a second round of pressure is applied to a struggling housing market). The economy also will not be helped by rising public and private interest payments. I think we have our culprit for the next major bear market leg... no surprises here.

The recent weakness in gold has confirmed that our little yellow friend did not enter rally mode off the February low but rather is still in consolidation mode. These types of consolidations in gold typically end with a panic sell, and knowing this fact can help us traders keep our wits about us when the panic occurs. Around the same time that the dollar should be topping (week after next), we will likely see a panic day in gold that will test or marginally break the $1025 breakout level. I want to be a buyer of that panic because the snap-backs are powerful and the ensuing rallies are usually fast and furious.

In the meantime, there is not much to do until stocks correct and the dollar completes its surge. At that time we will reassess the demeanor of the market and plan the next moves.


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