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May 31, 2010

Gold Primed

If this cyclical bull is to end with the blow-off rally discussed here for several weeks, the move is going to have to catch some wind fairly soon. Quite a bit of technical damage was done during the May sell-off, not the least of which was a break of the February low. In fact that break, although marginal, puts a return to a new cyclical bull high in serious doubt. Another warning sign is found on the 65DMA:

stock market correction or bear market

Of course, the 65DMA frequently turns down in ongoing bull markets, particularly during intermediate-term corrections. However, since our view on this cyclical bull has been one of a liquidity-driven, reactionary event that would last about a year, the time is ripe for the hunt for a top.

On a shorter-term scale, the time is also ripe for a significant bounce. Consider the McClellan Oscillator:

stock market technical indicator

The question now becomes whether stocks can muster a bounce off extreme oversold conditions. As we all know, a market's inability to rally off oversold conditions is a hallmark of bear markets. So if the S&P 500 weakens to a new low from here, we can be almost assured the bear has returned. One could also watch the Banking Index for confirmation:

Philadelphia banking index

I have little doubt that such breakdowns, particularly the one in banks, would induce the Fed to find a rationale for cranking up the presses again. The problem with such behavior, however, is that it is much more likely to create a currency crisis than solve any problems. The gold market is obviously full of participants who have already sniffed out this inevitability, evidenced by gold's relentless rise in the face of a rising DX. I commented shortly after the 2008 crash that the next crisis would see gold as the beneficiary of a flight-to-safety rather than the dollar, and the mutual rise of gold and the DX also supports such a notion. In fact, the only reason the DX and U.S. Treasuries are rising is because the buck just happens to temporarily be the least unattractive currency in the world fiat regime.

treasury bond topping pattern

The most significant takeaway from all these machinations, at least for us precious metals bulls, is that gold is not likely to fall victim to another deflationary event, as many fear. Just the opposite. In fact, this second phase of the commodity bull market, a phase which began with the recovery out of the crash, is likely to be dominated by precious metals. A change in character is already evident in that our typical parabolic move was interrupted by a 5-month basing/consolidation pattern:

gold technical analysis

In the near-term, the potential for one of these surges playing out still stands strong. The technical setup for such a move is compelling. We just need to see what I term a "lock-out" day to trigger the final stage of the move. A lock-out day traps bear positions and locks sidelined bulls out of a favorable entry, inducing both groups to chase price higher.

gold bull market

In my opinion, the precious metals markets are primed for such a move. Let's see what this week can deliver and adjust expectations accordingly.


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