Silver: Seeking Confirmation Of A Bottom

Includes: AGQ, DBS, SLV
by: Avi Gilburt

Not a day goes by that I am not asked by multiple people if the metals have finally bottomed. Everyone seems to believe I have some magic crystal ball which will tell me ahead of time if we have reached the bottom in absolute terms. Yet, I said last week what it would take for me to confirm that a bottom is in place. While we have enough of a pattern in place now to consider the bottom has potentially been made, I am simply waiting for confirmation, and until such time, I remain somewhat skeptical.

While many of you have been sending me emails asking me if the low in silver is in, I must apologize, again, as I am simply not able to keep up with all the emails during the week, as my primary responsibility is to my members at Since I am answering the questions of my members all day long, it really does not leave me much time to address all the emails at Seeking Alpha on a continuing basis. So, please do understand.

As I said last week, for silver to begin providing evidence of a lasting bottom being in place, it must initially move through the 29.26-29.97 resistance region. However, silver stopped dead in its tracks right at 29.27 on Friday. So, for now, I am still quite skeptical, but not at all willing to short it with any confidence, until I see a break of the current support at 28.31.

From a sentiment standpoint, many metals' analysts over the last week or two have been noticing certain inter-market relationships and correlations that cause them to view that silver's best days are behind it. I think they may be very surprised.

I have seen many pointing to the strength of the U.S. dollar as the reason that silver has been languishing of late. In fact, the dollar has done the exact opposite of what everyone has expected over the last few months. It was back towards the end of 2012, with the Fed's QE3 and QE-Infinity programs in full swing that everyone was so certain that the dollar was going to drop hard. In fact, even most technical analysts were pointing to a Heads & Shoulders pattern, expecting the dollar to drop hard and fast.

Yet, I was warning to expect the exact opposite in the dollar. Yes, I was suggesting that the dollar was going to rally in the face of all this quantitative easing. And, yes, at the time, everyone viewed me as simply foolish for believing that the dollar would rise in the face of the Fed's actions, in the same way that many of the metal's enthusiasts viewed me when I suggested that the metals were topping, and even maintained my stance immediately after the Fed's last easing announcement.

But, as many of them now look at the dollar rally in disbelief, unable to come up with strongly supportable reasons as to why the dollar has maintained a parabolic rising structure in the face of QE-Infinity, many have simply accepted that the dollar is strong and will continue in this current rally. And, rather than take a step back, and attempt to find an intellectually honest perspective that can explain this seeming "phenomena," they continue on their merry way, while scratching their heads, and waiting until they can again claim that their "fundamental" perspective is right. Sorry, but this so smacks of the broken clock syndrome and it frustrates me when investors do not engage in independent and intellectually honest analysis. Yet, these same people use this clearly flawed perspective to explain why my analysis is faulty, despite the fact that I have predominantly been on the correct side of the markets.

In fact, since I wrote my last article on the dollar last week, which was calling for a potential near term top in the dollar, I have received tons of messages that, again, proclaim that I am crazy for thinking that this strong move in the dollar will end in the near term. Everyone who was touting a dollar crash four months ago - when I was looking for a dollar rally - is now bullish, and expecting levels exceeding 84, with some even claiming the dollar is heading straight over 90.

But, this is exactly how sentiment works. This is exactly why most people get caught on the wrong side of the market. The stronger the rally, the more people are convinced in its ultimate continuation. This is also linear analysis at its best. The problem is, such analysis is never able to know when the strong rally will end. They simply assume it will continue until it doesn't. Anyone remember a little company named Apple (NASDAQ:AAPL)? And, yes, I published an accurate top call in AAPL too, expecting a top in the low 700 region, with an expected strong drop initially to the 500 region, while everyone else was looking at minimum targets of 800, and many with expectations of over 1000. We all remember the strong majority's lofty expectations last summer, and, unfortunately, many were badly hurt by that "unexpected" crash.

Ultimately, my point is that for those who view that the dollar rally as hurting the metals, you are about to be pleasantly surprised that the dollar is very near its topping point. As you can see from the dollar chart below, the blue boxes are targets that I have provided long ago on, as well as on MarketWatch, as a potential directional pattern that I identified in the dollar back in the last quarter of 2012.

But, I would like to make a side point to those who believe, within their heart of hearts, that inflation or hyperinflation is a certainty because of the Fed. If the dollar's recent reaction has not placed questions into your minds about the omnipotence of the Fed, then I believe you have simply parked your brain in neutral. Every article I have written of late has attempted to push you to view markets beyond the common perception of the public, and I implore you to continually view markets from an intellectually honest perspective. Don't' simply accept the majority perception of the market, as the majority is usually wrong and the majority maintains the view that "you can't fight the Fed." Well, did someone forget to give the USD that memo?

As for silver's price pattern, as I mentioned last week, we hit my long-time minimum target for an expected bottom in silver within 4 cents of my target. While this can represent a lasting bottom for silver, as I also mentioned last week, silver must prove to us that it represents a lasting bottom. However, I am not yet convinced.

As I noted last week, the first step is that silver must maintain an "impulsive" structure pointing higher. However, the structure that silver provided us over the last week has certainly left a lot to be desired in the eyes of this Elliottician. Furthermore, it had to move strongly through the 29.26-29.97 region. However, it ended the week with a high of 29.27. So, please forgive me for remaining skeptical. We have seen too many of these false break outs that never confirm, so I will continue to remain skeptical until I see at least a minimal structure telling me to become more immediately bullish.

But, there are two factors that I have to note, from a technical perspective. First, the last bottom in silver was created on positive divergence, which we have said needed to be seen as one of the points of confirmation for a bottom. However, it does not prevent silver from looping down one more time for one more low on more pronounced positive divergence. Second, the buying volume in silver has been rising steadily at each move off the higher lows, which is what I want to see for another signal that the parabolic rally has begun.

So, I will not suggest that the majority of investors short silver at this time with the expectation of a new low, as the snap back can be so violent that it can take you from a profitable short position to a loss in the blink of an eye - especially if you use options, which exposes you to overnight gap risk. For now, the time for easy money on the short side has passed for most investors, and the shorting game has become very dangerous at this time.

For the upcoming week, my expectations remain the same as last week:

"First, silver must continue to the upside early next week on strong buying volume. Second, based upon Elliott Wave analysis, we must see a 5 wave impulsive structure to provide us further evidence that a long term bottom is in place. Third, we must move through the initial resistance region between 29.26-29.97, as any move up that weakens into that region can provide another local top for silver, which can turn it down back to the lower Fibonacci extensions at 26.87.

But, assuming silver can move through that region with an appropriate Elliott Wave structure, which is supported by the internal Fibonacci structure and technicals, then the next major hurdle will be the 30.90 level. Assuming we can move through that level appropriately, then the final test will be within the 34-35 region. The reason that region is so important is that this is where we can see a relatively significant top for silver to complete an intermediate triangle, which can still turn silver down into the low 20 region".

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 may initiate protective puts based upon the upcoming week's action.