Silver: Will $28 Hold, Or Are We Going Down To $22?

Includes: PSLV, SLV
by: Avi Gilburt

Every time I write an article on silver, I always get the same comments time and again. You would think that people would get tired of the same mantra over and over. But, alas, it just never seems to be the case.

So, before I get to the technical aspect of the article (yes, the part where we make money), let me start by addressing some of those "fundamental" comments, which have led many astray, and have caused much money to be lost.

Market Manipulation

One of the most common comments I have seen is that the silver market is manipulated and the ordinary investor cannot trade silver since the "hucksters" (bankers) will always cheat them out of their money. Many have attempted to prove this through lengthy analysis and papers by showing how the "big boys" maintain huge short positions in the market and do not "allow" it to attain the "true" target of $200 an ounce.

Personally, I can understand their perspective, as I think there is a significant amount of corruption throughout this great country of ours. But, while the "big boys" have had large positions in silver for years, I do not believe that they are manipulating the markets to the degree that many believe. In fact, how can it be that some lone analyst sitting in a small town in Maryland can identify tops and bottoms in the silver market, often within pennies, if the markets were manipulated and did not have a specific pattern through which its movements are governed and can be tracked?

Well, maybe I am part of the problem and I just have a really good inside track to the "manipulators," and they send me quick notes about when they intend to run up the price or to tank the market!? That must be how I was able to warn everyone to get out of silver and even short it on the 28th of February of this year, the day before the metals flash-crash. Maybe that is also how I called the recent top in the 35.40 region, even in the face of the recent Fed QE3 announcement.

And, if you believe this, I have a bridge to sell you. Rather, the movements in the silver market clearly fit into an Elliott Wave pattern, and those patterns are driven by public sentiment.

Let's be honest about this, was anyone complaining about "manipulation" when silver was rocketing towards $50, and the bankers still had huge short positions? In truth, those that vociferously utilize this argument are clearly unable to invest or trade in silver profitably, and, it simply cannot be as a result of their own inadequacy, so it must be that someone else is screwing them.

My point to them is "grow up" and play the hand you are dealt. Either learn how to trade the metals, or get out and stop complaining. Since our goal is to trade metals profitably in both directions, this perspective does nothing to assist us to that end. So, ultimately, it is a useless perspective for those that want to trade profitably. The sooner you realize this, the sooner you can actually make money in the metals and the sooner you will stop blaming others for your losses.

The Fed's Involvement Moves The Market

The next argument I hear is that the Fed's injection of capital is what moves the metals. I addressed this in many articles I have written, and do not need to go through it in detail again. But, if this is the core of your investment strategy in the metals, my condolences to you, as you are probably feeling a lot of pain right now, and may continue feeling a lot more pain in the near term.

How one can see the Fed as the cause of metal movements is simply beyond reason and completely ignores the facts on the ground. As an example, back in April of 2012, I noted how silver rose 15% after a Fed announcement, but also dropped 11% after the exact same Fed announcement several months later.

For those that were "hoping" for the Fed's QE-infinity announcement back in September to ignite the expected parabolic rally in the metals, you were seriously disappointed. Although the metals did move up right after that announcement, the top of that immediate move marked the top of the market and we have not seen those levels since. In fact, we called the top in the market within 9 cents, yes, even in the face of the QE announcement.

And, now, with the recent QE4 announcement made by the Fed, not only did the market not rise, but it has fallen almost 15% since that time. And this was after I posted that the 35.40 region would mark the top in silver until a return to at least the 29 region.

So, I guess the "waves" are more powerful than the Fed!! And, if you think I am joking, I am really not. What I am really saying is that sentiment, as measured by Elliott Waves, is much more powerful than the Fed. Irving Fisher learned this the hard way during the Great Depression and wrote about it extensively thereafter. And, if you chose to ignore this fact, which has clearly been supported by silver's recent price action, then you have no business investing in metals and will likely lose your shirt.

Where Is Silver Headed?

As I mentioned in last week's article, I noted that if silver cannot begin to rally on strong volume, it will roll over and target the 29 region. Well, that is exactly what we saw this past week, as silver could not even muster enough strength for a reasonable bounce. Furthermore, the volume on the downside confirmed that silver is in a strong trending pattern to the downside right now, and there are no signs that it has yet completed.

At this point in time, silver has stopped right at the top of my next target zone almost to the penny. Yet, as I just mentioned, I do not think the downside is done. I think we will likely see silver move deeper into this blue box target region in the near term.

Currently, there are two patterns I am watching in silver. The first should not see the silver futures below the 27.75 level, and then begin a very strong rally from that point.

But, I think the much deeper target pattern has an equal possibility at this point in time. In fact, if silver does break down below 27.75, then my minimum target becomes the 24.75 level, with the potential to drop as deep as the 22 region. But, for those that want to either exit their long positions in this pattern, or even short silver in this pattern, I would expect that silver should initially maintain support around the 26.50 region and bounce as high as the 28.50 level (with the outside chance it can reach as high as the 29.60 region). This would only be setting up one more decline to take it below the 26 region, which no one seems to be expecting.

In fact, it seems that everyone is now expecting that silver is going to test the 26 region again and rally from there once again, as it has so many times. But, not me.

Either silver is going to hold over the 27.75 region and begin its expected strong rally from there, or it is ultimately going to break down below the 26 region, but only after a bounce from the 26 region - which most will view as bullish, and begin buying heavily. They will ultimately be disappointed when silver follows through to the downside again, breaking down below the 26 level, and it will not likely find support to begin the parabolic rally until several dollars below the 26 level, which will likely stop out most of the participants who have been long while silver has maintained the 26 level.

So, the next several weeks to several months will be VERY interesting in the metals market for certain, and knowing what the possibilities are beforehand should emotionally prepare you for what is in store.

Disclosure: I am long SLV. I also have a significant put position on SLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.