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Equities had what’s known in the business as a rip-your-face-off rally Monday, exploding almost 500 points. The rally was no surprise; six ugly days in a row usually leads to a vicious short-covering rally. That’s exactly what we got — a short squeeze in a market that has topped.
Gold also had a nice rally on Monday, not as powerful as equities but certainly based on the same short-covering set-up. After making highs at $1,365, gold has fallen on hard times and had been down nine out of the last 14 days. A short-covering rally was imminent and there it was Monday.
The rally in gold is continuing Tuesday while the equities are under a little pressure. The common thread here is volume, as both rallies are on declining volume. Indications are both have more room on the downside. We believe gold is a lot closer to a buyable bottom than equities. Look for support in gold at $1,300 and equities to have a much deeper sell-off.