Silver Shorts Feeling Squeezed?

 |  Includes: SLV
by: Patrick MontesDeOca

Let's take a look at the action in the silver market as we move into the latter part of the week. As I write this report, the price for the May silver electronic contract closed at 29.415 up more than 3% since the low of 28.31 was made just 4 days ago.

In a recently published article on Seeking Alpha entitled, "Will Silver Drop To $26?" I said:

"I hope so! Last week's free fall in the silver market might have created the final window of opportunity to buy for a major buy-and-hold strategy for the long term.

The fact that the market broke the January 4 and December 20, 2012 lows does not constitute a major top in the market. It is simply a test to lower levels of support and a huge opportunity to accumulate at these levels for the long term.

The $28 to $28.50 price level serves as a maximum extension for this correction using Gann Trend lines. It confirms a major level of support based on the downtrend line support extension starting from the November/December 2012 lows, and connecting the January 2013 low measures almost to the dime (a pre 1964 dime that is!).

The upper end of this trend channel is in the $31.50 area. A weekly close above $31.50 potentially could ignite massive short covering. If this upside breakout occurs, a sharp rally towards the $33.50 to $34 level could rapidly materialize."

The fact that the market has rallied with increasing volume for 4 days in a row from the 2013 lows made early this week, might have caught some shorts by surprise and could set the stage for more short covering to occur.

On the last FOMC meeting, Federal Reserve Chairman Ben Bernanke sent a strong signal that he backed the continuation of the central bank's $85 billion monthly bond-buying program.

"In the current economic environment, the benefits of asset purchases […] are clear," Bernanke said in remarks to the Senate Banking Committee. See MarketWatch's live blog on Bernanke's testimony to the Senate Banking Committee.

This was a complete reversal from Fed's previous comments made regarding the possibility that they might be ending their monthly bond buying program and mortgage backed securities totaling $85B sooner than expected. Instead it confirms the need to continue to stimulate the economy by printing more fiat currency (Inflationary) and as a consequence, continue to kick the can down the road. The problem is that this road is leading to a dead end.

The Commitments of Traders report recently published by the Commodity Futures Trading Commission points to some very interesting developments in the gold market.

Huge gold short position detailed in Commitments of Traders

"The producer merchants, the category that includes the natural hedgers, are at their lowest net short position since 2008 at the same time that the managed money traders, the funds, are record short and at their lowest net long position since November 18, 2008," said Gene Arensberg, editor of the Got Gold Report. "I have not seen the COT 'rubber bands' so over-stretched in opposite directions as they are now."

The funds showed a collective reduction of nearly 36%, or 23,772 contracts, in their net long gold positions to an "extremely low" 42,810 contract net long positions, according to Arensberg.

Extreme lows for the managed money net long positions are "usually associated with important bottoms for the price of gold," said Arensberg.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AGQ, PSLV, SLV, GLD, PHYS over the next 72 hours. 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. The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed herein constitutes a solicitation of the purchase or sale of any futures or options contracts.