Silver: Do Not Be Fooled - Lower Prices Ahead

by: Avi Gilburt

Over the last week, we have seen more articles written about silver than I have seen in a very long time. And, yes, the articles seem to still be divided by the party line between the uber-bulls, and the rest of the world.

While the uber-bulls are, well, very bullish, I can take no cues from that camp, since they are almost like a broken record. They have no ability to see the market from an objective point of view. When we start seeing cracks in their armor, that is when we know we are really approaching a bottom of some significance. And, anecdotally, I am beginning to see some faint cracks.

But, the rest of the world is just about ready to give up on the metals. Most analysts and investors have seen the break-down of the two year support level, and have now pronounced the end to the bull market in the metals.

Yet, this past week, we saw a resurgence in the price of silver. And, yes, it brought out all the bullish articles once again calling for the bottom in the metal. But, sorry to burst their bubble, they are most likely a bit early to the party.

Sentiment in any asset, whether it be the stock market, currencies or metals, moves in very specific patterns which tells us a lot about the psychology of the market participants as a whole at any given time. Sometimes, the message is not entirely clear on the smaller scale, but the larger scale provides very interesting insight.

The larger scale messages that I am able to read from the metals is that the bull market is not over by a long shot. Does that mean silver cannot drop down much, much lower, and even, dare I say, see the 11-14 dollar region again? No, it does not mean that, as that is definitely a possibility, but not a high probability at this time. But what I am seeing is that silver is simply setting up for the next larger rally it will see on the very long term scale. Additionally, the deeper silver goes in a retracement, from a sentiment standpoint, the higher it will likely see in its next larger bull run, as it is now being stretched like a rubber band.

So, this brings me to the point that I made last week, which is that very long term holders in metals, as well as those that hold the metals for insurance purposes, should not be unloading their metals, but should stay the course, even if they did not listen to me and get out in the 40's to re-buy at half price in the 20's. But, most of them will not sell no matter what happens, so my words would have fallen on deaf ears anyway.

But, for those that are looking at the metals as a trade, I will tell you that we have not likely hit bottom just yet. In fact, I am expecting at least one more "scary" drop which will likely make another low. Since the last low was at the bottom of my long time target region of 22-24, I do believe we can break that low and see a 20-21 handle on this next drop, with an ideal target region of 21.50-21.80 in the futures. The manner in which we rebound from that drop will tell us a lot more about whether we have hit a final bottom.

But, my initial feeling is that the next rally from my next expected drop will also be a corrective rally, setting up one final drop to complete the 2+ year correction. Yet, I will still be trading the next drop as if it is the final drop. Ultimately, as I mentioned last week, I do not want to see a significant breakdown of the 19.80 level, as that could have more bearish implication for the metals for much lower levels to be seen.

As a final point, I know many of you are looking at the latest COT report, and saying to yourselves that silver is clearly very bullish right now. But, what you fail to take into account is that the COT was dated for positions as of April 23rd. That was when the minor consolidation completed, which is actually when I personally went long for a small speculative trade, based upon the completion of the consolidation pattern, which I gladly exited on Thursday since I did not want to take the overnight risk on my short term options as we neared my target for that smaller degree rally.

So, again, remember that this report does not provide you with insight of the way these traders are positioned after this last rally we saw since the 23rd. My feeling is that their positioning may have well changed or is about to change early this coming week, which will not likely show up until the next report. This is the danger of using the COT report to attempt to trade in the short term in a market that moves quite quickly.

And, as many of you know by now, I trade multiple degrees of trend at the same time. So, while that last trade was a very small degree trade, I remain bullish on silver in the very long term, and now bearish on silver in the short term, as I am expecting another low within the next few weeks.

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 also have a position in short/intermediate term puts.