Silver: The 'Manipulator-In-Chief' Strikes Again

Includes: SLV
by: Avi Gilburt

This past week, the "manipulator-in-chief" expanded his circle of evil influence. Not only do I have a "hot-line" to the banksters to get them to sell silver on command (see my request last week for the mid-28 region to which they complied this past week), but over the last few weeks, I have been seducing another to come over to the "dark side." So, I am now proud to announce that Big Ben has turned to the dark side. And, no, I am not speaking of Ben Rothlisberger, the quarterback for the Pittsburgh Steelers. I am speaking of the head honcho located 18 miles from my Death Star/bunker in Maryland. Yes, Ben Bernanke now takes orders from yours truly. The "dark side" has now become even more powerful, as the Fed's equivalent to Anakin Skywalker has now been seduced by the "manipulator-in-chief."

Over the last week, we saw how the metals followed through to the mid-28 region, as we expected. In fact, we saw strong extensions down on strong selling volume. So, what are the reasons for this expected drop?

Well, I am sure many analysts will attribute Big Ben's turning to the "dark side" as the cause for the drop. But, not many of these analysts will have thought this perspective through. Rather, they are just looking for a "reason," since they could come up with any other beyond the standard "manipulation theory." But, please understand that the significant part of the decline occurred well before the Fed published their notes that hinted they were reconsidering QE and we expected this decline well before any "news" came out.

As always, I implore and challenge everyone to think for themselves rather than reading the drivel that is so often published. You need to be an independent, intellectually honest thinker in order to really understand these markets, rather than be swayed by the garbage that is printed in articles or espoused on television, which will never help you see what difficult markets will do before they do it.

If you are really honest about this, you will note that the silver market has dropped 13% since my initial top call several weeks back, of which a little over 1% of the 13% drop occurred immediately after the Fed announcement. In fact, the day after the Fed's publication of its notes, the silver futures were over the level from which silver dropped supposedly due to those notes.

So, if only a small percentage of the entire decline occurred after the Fed's announcement, can we really say that the Fed caused this larger drop in metals? Can we even say that the Fed caused silver to move higher, since it was higher the day after the publication of the notes?

Clearly, it is unreasonable to take either position, but there will be many that will still make this case, and they will do so in complete error. Unfortunately, many an analyst and investor do not seem to be burdened by the facts and/or are just oblivious as to what moves the markets. It is this pervasive lack of intellectual honesty which results in the absolute nonsense we see being printed almost everywhere that people write about markets.

For those of you that have read my analysis over the last few weeks, you will know that, while I did entertain the possibility that the market may try to exceed the 32.15 level, I have always been resolute that we will be heading to my targets in the blue box that I provided on the silver chart I published here, especially as long as the market remained below 32.14, which it did. And, this was while many were mistakenly claiming that the bottom in the metals had been seen, and the market was beginning its parabolic rally. Yet, the technicals and pattern were providing clear signals to me that this was not the case, and I distinctly stated in my prior writings that lower levels were still quite likely, even while being ridiculed by some for taking such a stance.

But, it seems that many analysts and investors are still riveted by news and world events and believe there is a cause and effect relationship between such events and the movement of the metals. For those that were not able to attend my presentation at the International Traders Expo last week, I addressed this "fundamental" perspective, and hope that I shed some light on this common fallacy.

Until the times of R.N. Elliott, the world applied the Newtonian laws of physics as the primary analysis tool for the stock markets. Basically, these laws provide that movement in the market was caused by outside forces.

Newton formulated his laws of external causality into his three laws of motion: 1 - a body at rest remains at rest unless acted upon by an external force; 2 - a body in motion remains in motion in a straight line unless acted upon by an external force; and 3 - for every action, there is an equal and opposite reaction.

So, the common belief was, and, unfortunately still is, that a stock will remain in motion in a straight line, unless something acts upon it, like news or earnings, to change its direction.

However, as Einstein stated: "During the second half of the nineteenth century new and revolutionary ideas were introduced into physics; they opened the way to a new philosophical view, differing from the mechanical one."

However, even though physics has moved away from the Newtonian mechanical viewpoint, sadly, our financial market analysis has not. In fact, how often do you see good earnings come out for a stock, yet the stock tanks? Well, we justify it by saying that they "sold the news." But, it then leaves you with the reasonable question as to how do you know if good news will cause a good reaction in a stock or a "sell the news" event?

As we all know, most market participants are looking for the next piece of news that is supposedly going to move the market. So, when they hear a positive news event being reported, they automatically assume that the market will respond positively. But, we have all seen markets sell off on positive news.

And it has had many market participants scratching their heads in disbelief, and, it unfortunately causes losses in their trading accounts.

In fact, I can no longer count how many times I have heard fundamental analysts claiming that a market rally or decline just does not make sense or is wrong based upon their fundamental analysis. I mean, how many times have we heard analysts state that the market is just not trading based upon fundamentals at this time.

Just the other day, I was listening to a fundamental analyst on CNBC who was actually claiming that, from a fundamental perspective, the transports market was wrong when it has been rallying of late.

But, it never occurs to such analysts that maybe their analysis methodology is wrong. Maybe the markets don't move based upon fundamentals. Think about it, does it really makes sense to use fundamentals to determine market movements if many of these analysts admit that markets don't always trade on the fundamentals? Could there be something else moving markets ALL the time?

As Elliott put it, "In the dark ages, the world was supposed to be flat. We persist in perpetuating similar delusions." Elliott urged that we move away from such misdirected analysis and view that external events affect the market only insofar as they are interpreted by the market participants. Such interpretation is guided by the prevalent social mood internalized by the investor community as a whole.

Therefore, the important factor to understand is not the social event itself, such as the news, fundamentals, or the earnings, but, rather, the underlying social mood which will provide the "spin" to an understanding of that external event or information.

During his tenure as the Chairman of the Federal Reserve, Mr. Alan Greenspan testified many times before various committees of Congress. In front of the Joint Economic Committee, even Mr. Greenspan noted that markets are driven by "human psychology" and "waves of optimism and pessimism." And take note, he did not say that markets are driven by fundamentals. He very clearly noted that it was psychology and waves of sentiment that moved the financial markets.

This simple premise now explains why markets sometimes rise when seemingly bad news or fundamentals have been announced and why markets go down when seemingly good news or fundamentals have been announced. When the social mood is within a positive trending wave structure, bad news is seemingly "discounted" and only good news is seemingly focused upon. And the reverse is true during a negatively trending social mood. Does anything else explain this seeming anomaly?

So, is it really the news or the fundamentals that are moving the market? The answer is obviously "no." It's the prevailing sentiment which interprets the news or fundamentals that moves the market.

So while most "fundamentalists" are looking to whether China or India will drive further demand for the metals, or if the economy is picking up for further manufacturing demand for silver, I propose to you that these are not the issues to focus upon. What they are doing is attempting to prognosticate the demand, which will then supposedly prognosticate the movement in the metal. But, even if they successfully prognosticate the demand in China, which many have noted has risen, it is no guarantee that the price will rise as well, and, in fact, we have still been seeing falling prices in the face of supposed higher demand for metals by China. Furthermore, such analysis cannot even give you reasonably accurate price targets.

Rather, sentiment is what drives both demand, and the price for silver. And, as I have noted in many prior articles, sentiment is actually track-able within certain probability ranges.

One of the anecdotal reports we look towards to gain some insight into the sentiment in the market is the relationship between the commercial traders' positions vis-à-vis the other trader positions as listed in the COT report. This week's COT report seems to be telling us that the commercial traders have covered a significant amount of their short positions on this decline while many of the speculators are heavily short. This is usually indicative of an impending rally in the metals.

But, remember, since these reports represent "old news," and do not reflect the market at the current time, they cannot be relied upon as a strong trading tool, but more in the way of an overall indication. Since these positions can easily change the day the report comes out, and most will not know about that change, it is dangerous to attempt to trade the metals purely based upon these reports, unless you are able to track sentiment in real-time.

So, then how do we know if something will change in the market sentiment? This is where we use our Elliott Wave analysis, coupled with Fibonacci mathematics. As long as the market remains below the 29 level, we can still see levels between 26.87-27.98 to complete this decline before we see an appreciable bounce. The ultimate point I want to make is that silver has not provided us evidence of long term bottoming just yet, even if we see an appreciable bounce, which we do expect in the near term.

To remind you of what we are looking for, when the metals form an intermediate or longer term bottom, we are normally able to see positive divergences on our daily charts when the final low is made. At this time, the technicals have become embedded, which only signifies that we are still within a 3rd wave down. While we may be developing a positive divergence set up in our 144 minute charts, I believe this is only going to be an indication for a 5th wave within this 3rd wave down. So, until we are able to see this evidence, we expect silver to hit our lower Fibonacci extension targets. But, this also means that we will likely see a 1-2 week move higher in silver, after this local bottom is found, in order to set up the positively divergent low that we want to see to mark the final bottom. So, assuming we see a low above the 26.87 level in silver within the next week or so, silver will likely come back up to the 29.75-31 region before the final lows are seen.

But, I will reiterate something for which many thought I was crazy when I first said it a year and a half ago: silver has the potential to still drop to the 22/24 region. So, we are watching every move quite carefully in our Trading Room to be able to identify the bottom when it occurs.

As an aside, while I endeavor to respond to your comments in a timely fashion over the weekend, I apologize that I am not always able to respond during the week. Since I run a website wherein I am constantly answering real-time questions posed by my subscribers, as well as publishing charts and my comments about all the markets we follow, I do have little time to come back on Seeking Alpha during the week. So, all those that are sending me emails and posting questions about what my expectations for the metals are during the week, please understand that I have many responsibilities, and if you really require such real-time advice, you can always visit me on my website and pose real-time questions of me there. Thank you in advance for your understanding.

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 intermediate term puts on SLV