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August 23, 2009

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It was a tough week for bears. After teasing them with a fat drop on Monday, equities posted four straight winning sessions, closing near the high of the session each day. Friday's ramp job was particularly cruel because the market printed new intraday and closing highs for the rally out of March and did so on opex. Since Berskanke chose an opex Friday to deliver some blabber about how rosy things were looking, I'm guessing that his friends over at Government Sachs were holding piles of call options and simply manufactured an easy opportunity to fatten their wallets.

s&p 500 chart

Given how obstinently the SPX 950 pivot acted as resistance before it was conquered, it is quite surprising to see the index crack the next level of resistance without a back-test. The action is a testament to how powerfully effective the printing presses have been. You can also see why I decided last week to hang up my shorting boots until the SPX loses the 65DMA. There is simply no telling what kind of move will unfold to end this rally. A quick 20% rally to top things off would not be out of the question... it would be likely, in fact... and don't be too shocked if equities grind their way back to nominal all-time highs by next year. I'm not predicting this... just saying be careful.

Of course, if the flood of money is benefical to equities, it will be even more benefical to our favorite asset class: precious metals. Gold and silver have been lingering for quite some time, but I sense something big on the horizon. You all know the macro outlook, outlined in the last post, so let's have a look at some charts.

weekly gold chart

gold price chart

platinum prices

gold mining ETF

As you can see, the charts are betraying a lot of pent-up demand, which could resolve with an explosive move higher. I am positioned quite aggressively for such a move and so am on guard for signs I may be wrong. One item to watch is the near-term GDX trend line:

weekly gold miners index

If I am correct about the outlook for metals, GDX should use the trend line as a launching pad. If the line is lost, it would therefore be an early warning sign that something may be wrong. In the meantime, full speed ahead.

 

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