I felt it necessary today to re-visit my older view on the silver market. Most readers know that I have been extremely bearish on silver since the euphoria phase peak in May of 2011 and that acceleration of my bearish view took hold after the gold double top in October of 2012.
I wanted to go back to the post I made on October 18, 2012 in which I cited the formation of a very bearish pattern emerging in the silver market because we are getting closer to possible confirmation of the pattern I highlighted at the time. Remember, the time frame associated with the chart was a long one which is why the pattern was taking so long to develop but I do believe we are reaching a very important crossroads for the silver market and that crossroad is coming soon.
Remember in that post I charted out a troubling large head and shoulder top forming in silver? Here’s the original chart I posted at the time:
As you can see, prices have since moved well below the area of prior strong support and the pattern of that head and shoulder top is starting to become clearer.
Keep in mind that we need validation before we can make an absolute call, but with prices failing to even come close to charging forward despite Helicopter Ben Bernanke’s testimony of the last couple of days (remember, according to the silver bugs, it was supposed to be that endless QE that was going to propel silver “to the moon”) I remain extremely concerned that silver has seen the last of the high 30’s for quite some time to come and it will need to revisit lower levels before major buying kicks in.
As I have often pointed out with head and shoulder formations, we look at the neck line and we see how far above that neck line the price peak was. We can then use that as a reference to the ensuing correction of the pattern confirms. With that said, the neck line is $26.15. The peak was $37.58. That is an $11.43 move (approx a 43% move). Should silver crack that neckline, it is not inconceivable that a move down of roughly 43% would ensue or, we could see a bottoming out of silver at roughly $18.50 (an equal move down of 40-45% for the pattern to complete). Now before anyone goes crazy filling my inbox with all sorts of banter and quotes from the silver bugs that is often regurgitated without anyone ever verifying their claims, keep in mind that no pattern ever needs to fulfill or confirm and any news event can change the outlook on a moment’s notice. Technical analysis is not an exact science but despite what people claim, major patters like this often confirm as have many of the major patterns along the way. See that double top at 35.44? That pattern validated. See that minor head and shoulder at $37.58? That pattern validated. See that head and shoulder comprising the left shoulder on the above chart? That pattern validated. Lastly, continuing to work left on the chart above, see that head and shoulder pattern with 44.28 representing the head? That one too validated. So, say what you want about technical analysis, it is more often correct than wrong.
What has me so concerned is simple and I will lay it out for you as elementary as possible;
- We had extreme bearish sentiment in gold and silver over the last month. Despite that, rallies have been muted and unsustainable.
- We were supposed to see exceptionally higher silver prices because of the FED and ECB money printing. If it isn’t obvious to anyone by now, those theories can be thrown out the window;
- Two days of Bernanke testimony that helped propel the stock market higher failed to cause a lift in the gold and silver markets … only temporary but sellers came back in droves.
- The silver chart looks absolutely terrible at the moment with sellers outnumbering buyers by a great margin. In fact, when we do see bargain buyers step in, we note that they quickly trade out and are outnumbered by the sellers shortly thereafter.
There is one factor that might still lead to a major rally though in the metals and that is the extreme bearish sentiment that exists at the moment. However, note that despite the dollar doomsday experts predicting the end of the dollar, the US dollar continues to rally, negating what looked to be a head and shoulder pattern over in the dollar causing the metals to slump further. The Euro looks to break down again as extreme bullishness starts to wane over there which could pit additional pressure on the metals. Take a look at the current chart of silver over the same time frame of the chart above:
I have no position in the silver markets at the moment. I will get extremely short if this pattern validates and I will go long if I see a reversal. However, I am deeply troubled by the pattern taking shape in the silver chart and how it has come ever closer to confirming since I first wrote my piece in October of last year. Here’s my upward bias… First the chart:
Notice the top line of the downward trending channel in place since the $35.44 high. I would only go long for a potential extreme move IF we get a CLOSE above that trend line, or above $3.75. Right now, we are in a dangerous area and in my view, it would be smart to stay on the sidelines. Sure, one might lose a couple dollars of a move BUT, if I’m correct, we will see significant rally in silver if we break out of the aforementioned trend line or we will see a massive move down if my aforementioned pattern confirms. So, there is no harm for the moment in staying on the sidelines and letting this all play out.
Tread carefully my friends .. and enemies for that matter. The major indexes look to be putting in a major top and the commodities coming off may have been the lead indicator on that front. There is a positive in that last comment on the broader markets. If we do see a major market correction in the major indexes, where will the money flow? Part of me thinks it will flow into the safety of the dollar and perhaps gold. I am not convinced though that we have seen the lows in silver and gold and for a truly healthy move to the upside to ensue, perhaps a lower move, or a flush is needed.
Quantitative easing was supposed to be the saviour for gold and silver. Clearly silver has now given up most of its QE gains. Something that the perma-bulls won’t bring up because remember, that has been their reason for pumping silver bullion since 2009 and to be honest, for continuing to pump it since the top in May of 2011. We are now approaching 2 years post silver highs and where is the price of silver? Almost a full 50% lower. This is concerning. Many people got burned by buying massive amounts of “stackable” silver leading up to May of 2011. Many investors were wiped out by the May 2011 crash. Those buyers are understandably reluctant to come back tot he markets and I honestly feel this has hindered the metals but that’s just one reason of many but a strong consideration nonetheless.
Gold and Silver remain firmly in dangerous territory. My best advice at this time is to stay neutral and to not go short or long until we get validation in either direction. Nobody every lost money by staying on the sidelines. Trade safely, wisely and without emotion, although I understand that the latter is the hardest to do.
