Silver: Are We Heading Back Down To $26?

Includes: AGQ, SLV
by: Avi Gilburt

Last week, I provided the readers here on Seeking Alpha some background about Fibonacci mathematics and its application within our financial markets.

Of course, there are many of you who remain skeptical. How can a mathematician who lived right after the Dark Ages provide anything of usefulness to us trading in the financial market of the 21st century? Moreover, many of you even view the fact that I am wrong on a minority of my market calls as a clear indication that this methodology is flawed and should be discarded as voodoo or charlatanry.

When I see comments like that, it tells me that there are still many people who do not understand the basics of trading, and I think it may be time to provide some discussion about perspectives in trading. While this may not be "fundamental" to the silver market, per se, I think it is of utmost importance to anyone who is attempting to invest or trade in any financial market.

First, I need to state that trading and investing are matters of probability and not certainty. Everyone does all the research in whatever manner they deem appropriate purely because they want to get the probabilities on their side when they place their money at "risk." There are no absolutes in the financial markets, otherwise, you would not be viewing your money as being "at risk." So, clearly, our goal has to be to do our utmost to have the stars align for us and have the greater probabilities working in our favor.

While those that have taken the perspective that a minority of inaccurate market prognostications invalidates an analysis methodology, clearly, I vehemently disagree. If one were to have a trading plan wherein they entered the market within low risk zones, allowed themselves to be stopped out if the trade went against them, and allowed their good trades to run to their targets, all one needs to do is be 50% correct on your trades to be in a position of significant profit. Again, this is all a game of probabilities.

But, let's take an honest look at the opposite end of the spectrum of what not to do, and then we can come full circle to how one should be viewing one's trading or investing.

So, what is the perspective of some amongst the readership with respect to the methodology I propose? These are usually the same folks who were holding on to their silver positions in the 45-50 region (many of whom even bought more in that region) because their "fundamental analysis" was telling them silver should go much higher. And, when silver broke below 40 (after I was suggesting shorting it on Seeking Alpha from 43 to 26.80), they still maintained their perspective, because their "analysis" provided that silver was going higher. And, when silver dropped below 30, they were still holding, even though silver was now 50% of what it was at the top of the market. Yet, amazingly, they claim the "fundamental picture" had not changed, so, they are "right" for holding. Excuse me for shaking my head in disbelief whenever I hear this perspective - or, should I say, excuse.

Along these lines, there are two quotes from Ben Franklin, which I believe most investors need to ponder:

"So convenient a thing is it is to be a reasonable creature, since it enables one to find or to make a reason for everything one has a mind to do."

"Geese are but Geese tho' we may think 'em Swans; and Truth will be Truth tho' it sometimes prove mortifying and distasteful."

So, it leaves me with the question of how can one claim, in an intellectually honest manner, that their perspective is "right" if they are losing 50% of their investment value? Yet, these are the same people who not only question a perspective that has called most of the tops and bottoms in the last year and half in the metals, but even ridicule it, based upon their perspective of being "right" for holding on to an asset that has lost 50% of its value. This is truly the human ego acting in overdrive, and it is the biggest impediment to successful trading or investing in the financial markets. This is the perspective that "there cannot be anything more right than my perspective, and I am going to hold until I am proven right!"

So, if this is your perspective for investing or trading, please feel free to read an article I wrote some time ago called "Buying High, Selling Low: No, No, No!" to understand what is wrong with the common investor's perspective and how market sentiment can cloud an investors thinking.

Again, I am not standing before you claiming that there is any methodology that will always be right. But, I am claiming that there is a much better way to skin the cat than holding on to an asset through a 50% decline. The first thing one must do is to let go of all ego, and allow yourself to recognize early enough that you are wrong, so you can exit a losing position before it turns really ugly. There is never an excuse for holding throughout a 50% decline. But it also means you need an objective standard and methodology to tell you when you are wrong for holding that asset, and if your method tells you to hold steadfast during a 50% decline, then it could be your method is just not cutting it.

This now brings me to the point of how to use the methodology I utilize for trading purposes. I am a very big believer in appropriate position sizing, as well as using stops and targets. The manner in which I calculate both the stops and the targets utilizes Fibonacci mathematics, as well as Elliott Wave analysis. While many of you see that I provide very exact levels in my analysis, the only reason I am able to do so is due to a combination of these two methodologies. As I have explained before, these combined methodologies are based upon tracking market sentiment, and if you understand how the market can move, then you have a strong clue as to how to position yourself for that move a great majority of the time.

For example, last week, I said that silver can still target as high as the 32.40 region, but if the market were to move through the 32.65 level on strong buying volume, that would invalidate my bearish pattern, and I would stand aside and not attempt to short any longer.

Well, the reason that I used the 32.65 level is because that was the bottom of yellow wave i on my chart, and this rise was "counted" as a yellow wave iv. Meanwhile, Elliott Wave analysis has a rule that wave iv cannot enter the price territory of wave i, as it would then invalidate the pattern. This region also represented a Fibonacci retracement region of the prior decline. So, my Fibonacci calculations had me shorting in the 32.40 region, with a stop just over the 32.65 level. This provided me with another low risk entry to attempt to short silver one last time. But, note, that I use this analysis to come up with a natural point at which I would stop out of the trade, as it would mean that pattern was wrong.

Again, let me reiterate this point. Rather than continue to hold a position as it goes against me, as some of my critics have done for a 50% haircut, I have attempted a short trade with a 25 cent stop loss. For the moment, let's ignore that the market turned down again from this region, and had me in a profitable position on this short trade again. But, even if the market moved against me, this analysis methodology provided an objective perspective as to when I would have to view I was wrong! I certainly had no intention of holding a losing position that took me through the 32.65 level, especially while claiming that I was right for doing so.

With this market methodology, the market would clearly tell me when I was wrong, and it was time to move on for another set up. In this instance, even if I was wrong, I would have taken a 25 cent haircut, and not maintained a position through a 25 dollar haircut, while claiming that I was right to do so.

Along these lines, even though many critics point to me being "wrong" last year on the silver break out "call," note that this same methodology did not cause me to place a large amount of my trading capital at risk a single time during that period because it never provided the break out signal I noted you needed to see in those articles. Not once was that break out signal triggered in silver, and you should never have placed significant capital at risk if you had read the article beyond the title. In fact, I clearly warned readers and subscribers to wait for confirmation (which we never saw) before placing more capital at risk. So, if this "wrong" methodology does not allow me to place my capital at risk when it should not be put at risk, how is it then "wrong?" Yet, my critics point to these articles as proof that my analysis methodology does not work.

My ultimate point here is that I strongly suggest that each of you find a methodology that works for you which will not maintain that you are "right" in the face of a 50% haircut. Rather, you need to find a methodology that provides an objective perspective to identify when you are wrong, and to cut your losses - preferably at a bare minimum - so you can then get on the right side of the market and back into the position of profits. Isn't this the reason you are reading articles such as these? Isn't your point of spending time on Seeking Alpha exactly that - you are seeking alpha, that extra edge on the rest of the market!? What edge do you maintain if you simply "call" yourself right in the face of losses?

So, onto the silver futures perspective.


Many analysts still point to the supposed supply shortage in the silver market, and claim that we are headed higher immediately. But, these are the same analysts that have been saying this for years. Lately, they have been "feeling their oats" again, as silver has rallied over the 32 level yet again. As I have discussed so many times before, this is not what will ignite the parabolic rise in silver, otherwise, silver would have taken off months ago.

Others speculate that, due to the large inflows they have seen in the SLV, silver must be headed higher. And, yet, others still attempt to glean the direction of silver from movements in currencies.

While analysts have been badly whipsawed in the past while maintaining these supposed "analytical" methodologies, they have only led to frustration among investors who followed advice based upon these "logical" perspectives. As I have explained many times in prior articles, if the price of silver was determined by "logic," then silver would we be well over $50 long ago.

But silver is moved by sentiment, and our read on sentiment provides that silver will, more likely than not, see much lower levels before any parabolic rally begins.

Last week, I said that I will be giving a short trade one more try with a move up as high as the 32.40 region in the futures, and that I would stop out if we moved through the 32.65 level on strong buying volume. I also noted that the commercial traders were joining me on this short trade, based upon the COT report we saw two weeks ago. In fact, last week's report shows that the commercial traders seem to be on the same page as we are, as they shorted the higher levels we did even more aggressively.

My Technical Perspective

Well, the silver futures market came up to the 32.50 level, stopped, and has turned down by 1.30 so far. So, if you followed my analysis from last week, you would have risked 25-50 cents, and now have 1.20 profit in your trade. Well, this is the point in time where I suggest all traders lower their stops and the new stop would be just above the 32 level, so that you assure yourself of a minimal profit in the event that the market does move against us. This stop level is also based upon Fibonacci mathematics. So, now you would be in a no-lose position, while still maintaining your short position looking for our lower target levels and greater profit potential.

As for downside targets, I still maintain the same ones I have been noting for weeks.

My lower targets still remain valid - 28.67, 27.98, or as deep as 26.87. So, to answer the question in the heading of this article, yes, I am shorting silver in the very near term as a short-term trade.

But, I am not a foolish trader, as I still maintain a sizeable long-term long position in the event the parabolic rise begins sooner than I currently expect, as I am expecting a significant low to be put in in the near term. I recognize my fallibility as a human being, and understand the larger trend, for which I am prepared.

But, even if silver does not move in the direction I expect every now and then, I will not be playing the blame game and will simply recognize that I am wrong on approximately 20-30% of my silver trades and it is no one else's fault but mine, and it is not anyone else that is "manipulating" me out of my money.

But, I also mentioned to my subscribers in my Trading Room this past week that I believe that the 26.87 region in the futures becomes a much higher probability target at this time, due to Elliott Wave considerations, which I explained in a Wave Alert sent out this week, as well as within my Weekend Analysis. But confirmation of further downside is going to be seen with a break down below the 30.50 level in the futures, which should be seen on strong selling volume.

So, for now, as long as we maintain below the 32.00 region in the silver futures, I am expecting to see a break of the 30.50 level, and will then be looking for the 27-28 region for our next lows at which to cover the short trade. But, we will be lowering stops along to way at further Fibonacci extension levels to lock in more profit on the way down.

Congratulations to all of you who are in a "no-lose" short trade in silver right now.

I look forward to meeting many of you at the New York Traders Expo on Tues Feb 19, 2013 at 1:00-1:30 pm ET at the Marriott Marquis Hotel, where I will be speaking about Elliott Wave and Fibonacci Pinball. I will be meeting with attendee's right after the presentation in a Q&A gathering at the hotel.

Disclosure: I am long 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.

Additional disclosure: I have a short-term short position in addition to my longer term long position.