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June 8, 2010

The Waterfall is Drying Up

I'd like to clear up a misconception about the weekend post. I was not predicting a waterfall decline. Prediction in this business is a fool's game. We traders are always acting upon probabilities, and various developments tilt probabilities one way or another. The weekend post simply stated that recent action had the appearance of a mid-point consolidation, and I was very explicit in the last sentence of the post: Keep in mind that we still need to break lower out of the mid-point to trigger the second half of the waterfall decline.

Thus far, that level has refused to give, and the longer it takes to break, the less liklihood there is of a waterfall. Personally, I'd like to see the stock market erode rather than crash because precious metals have exhibited an inverse relationship with equities of late. The fear generated by falling stocks has helped fuel PMs higher. Furthermore, a slowly deteriorating stock market, as opposed to a crashing one, would leave mining shares free to continue following gold higher.

Speaking of which, gold tagged a new all-time high today, and although price reversed to close near the session low, the big picture supports a continued rally. Mining shares finished with 1-3% gains, providing a solid indication of support for near-term action in gold, while multiple price patterns on the gold chart suggest a move to $1400 is still in the works.

Weekly gold chart

technical analysis of gold bull market

I have little doubt that gold will find its way up to the $1400 neighborhood. The only question concerns whether the move will be climactic or steady.


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