Last week, I addressed the "market manipulation" and "Fed controls the market" arguments. Hopefully, I have opened many eyes to the pointless focus, by many, upon these factors in being able to determine the direction of the metals. In fact, I was even surprised by the many supportive comments I received last week as I pointed out the uselessness of these perspectives.
This week, I would like to address another "fundamental" fallacy, and that is investment via correlations. The proposition for metals is that all one needs to do is watch the direction of the USD and you will clearly know the direction of the metals.
In the past, I have pointed out many times how this proposition was ultimately fallacious. We have many periods of time in which metals and the USD have moved in the same direction. Yet, recently, many have been scratching their heads as they see the USD and the metals heading in the same direction. And, this can again change without a moment's notice. So, is this truly a consistently reliable perspective to employ when investing in metals?
As investors, we have to remember that seeming correlations are not the same thing as causation. In other words, it is not the movement of the dollar which moves metals. This is a mistake that is made by so many precious metals investors and advisors. Rather, if we remain focused on the fact that it is sentiment, and no other exogenous force, which moves markets, then we would only be focusing on the chart in front of us, which is what I always encourage my subscribers and Elliott Wave students to do.
In fact, as the equity markets were heading down this past week, all we saw was a week-long consolidation in the metals. So, those that believe that the metals are a risk asset and move in the same manner as other risks assets were disappointed. Additionally, those that viewed the metals as a safe haven have also been quite disappointed of late. And, as we mentioned last week, those that believed that the Fed's announcements of new infusions of capital were going to cause the metals to skyrocket were seriously disappointed with a 15% price drop in silver, and absolutely the complete opposite of their "logical" expectations.
Many are now even proposing that the bull market in the metals is dead since they have not been positively reacting to the Fed injections as they have in the past. Well, if you view the Fed as the "cause" of the metals rally, then your position would be "logical." But metals are not moved by logic, nor are they moved by the Fed - as I have been saying for as long as I have been writing articles on metals. Rather, movement in the metals is directly caused by sentiment, and the overall pattern is telling us that there is one more parabolic rally left in the metals - with or without the Fed, but sentiment is not yet ripe for this rally to begin.
So, in effect, everyone who was looking towards the traditional analysis methodologies for the metals have been shown the door lately, as their methodologies have been proven quite useless and ineffective.
Yet, we at ElliottWaveTrader.net have been quite happy with our progress in silver, as it is playing out as we had envisioned almost to the penny. In fact, it is now adhering to an almost perfect pattern that we like to see. But, many doubters still take the position that I am simply very "lucky."
Remember, back in November, before the Fed even made its announcement of a second QE infusion, I called for a rally to an expected top in the futures of 34.40 (silver topped at 34.49), to be followed by a decline with an initial downside target of 29.70 (and we bottomed so far at 29.67).
So, did the Fed's announcement really "cause" the move I had called for before it made its announcement? If you believe that, then it is only logical to believe that there was something else in that statement that investors waited several days to read which then "caused" them to immediately rethink their long positions and sell off 15%! Seriously?
Again, if you are an intellectually honest investor, this will hopefully provide to you further evidence that it is sentiment which moves the metals, and not news, the Fed, or any other exogenous market condition. It should also provide to you further evidence that Fibonacci mathematics and Elliott Wave can provide you with a very valuable tool in any market, including the precious metals, which many believe cannot be charted.
So, this now brings us to what everyone wants to know: Is silver about to begin the parabolic rally over $60? My simple answer is, most likely, not yet.
The current consolidation is simply just that a consolidation before we head to lower levels. While it is yet possible that we can see a rally over the next week or two up to the 31.60 region, my expectation is that any rally should be capped below the 31.65 level, and will be followed by a decline to at least the 28.67 level, with potential extensions to the 27.98 and 26.87 regions. It will be the pattern with which we begin such decline that will tell us at which of these targets silver will find its next level of support. The deeper the decline, the more likely it will be that silver will ultimately be breaking down below the 26 support region.
As I mentioned last week, if silver drops all the way to the 26.60 region, it will likely see a rally from that level. But, as long as that rally is corrective in nature, and is capped at the 29.60 region, silver will be heading down one final time, and will break down through the 26 support level on its way to at least the 25 level, with potential extensions down to the 22 region.
So, for now, as long as silver maintains below the 31.60 region, it will be heading down much lower. Yet, any break out over the 31.65 level, which sees strong follow through over 32.65, would be my initial indication that silver has bottomed and we are beginning the rally to over $60. But, I do not view such a break out at this time as a high probability. Rather, lower levels will likely be seen before the parabolic rally begins. But, we have to be prepared in the event that the parabolic rally begins prematurely.
Disclosure: I am long SLV.
Additional disclosure: I also have a sizeable put position on SLV.