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March 10, 2010

Kinky Chain

The reversals posted by precious metals today were certainly disheartening to our efforts to catch a parabolic run. In the early going, silver was printing new, post-correction highs, and gold was on the verge of forming a swing low with the potential to mark the beginning of a new daily cycle. And then the bottom fell out, bringing gold and silver to tests of $1100 and $17, respectively. While it may be tough to find a positive spin to such action, I'm going to give it a try. First, have a look at the swing low that formed in August:

gold daily cycle low

Large traders are known for gunning the stops just before a significant inflection, and I can guarantee you weak hands capitulated by the score on the trend break. Daily cycles in gold also have the habit of ending with mini panic sells:

GLD intraday chart

If today's action did, indeed, constitute an ending panic, then the low of the panic should not be violated. Therefore, a break of that low could be used as a stop for reducing exposure until the waters clear.

As has been the case for some time, the ultimate resolution of this stand-off rests with the fate of the dollar.

dollar index chart

The kink in the chain is the strength in equities. While we have thus far treated the persistence of equities in the face of overbought conditions as a positive, stocks are going to have to take a breather at some point. Wouldn't it be fitting for a pull-back to occur just as gold is set to reverse higher, thereby delaying gold's rally? Sound familiar? It is exactly what we gold bulls suffered in January.

Tomorrow's action should be telling.

 

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