Silver - Potential Whipsaws Ahead

by: Avi Gilburt

There is not a soul alive that has traded silver and not been stung by its volatility. In fact, for those that know how to trade it well, its volatile moves make it an exceptionally profitable endeavor. However, it does not mean that even the most experienced and accomplished silver traders do not get bitten every now and then. And, when we approach a meaningful bottom, the moves become that much more volatile, and present opportunities- as well as danger- if on the wrong side of the trade.

Last week, I said that I wanted to see another decline in silver, which should be followed by a strong rally. Well, that is what we saw down to a tee. Yet, I am not convinced that another such strong downside move, followed by a strong upside reversal, will not be seen just around the corner. In fact, as long as silver respects the $22.75-$23.05 resistance region, we can see silver drop down to make another low in the same fashion as we saw last week, followed by an even stronger rally than we saw last week.

However, if silver is able to move through the $23.05 level, it makes it more likely that we are heading up to the $26/$27 region, before another larger - and final - decline will be seen later this year.

In conclusion, I want to address one further matter. While I reiterated my position that, despite the common belief to the contrary, QE was not going to cause a rally in the metals, we saw something last week which suggests another fallacy regarding the metals may be soon put to rest. Many also seem to believe that the metals will be bought as a "safe haven" asset when there is turmoil in markets around the world. Well, on Thursday, we saw quite a bit of turmoil in Japan with the markets taking a 10% haircut in a matter of 24 hours. And, yes, silver did rally. It went from $21.94 all the way to $22.62. Not exactly the type of spike one would expect for a "safe haven" asset when a major worldwide market loses 10% of its value within 24 hours.

So, while many are coming to recognize that the old expectations of what moves the metals are pure fallacy, I hope they ultimately come to the realization that it is market sentiment which causes moves in the metals in both directions. And, as I discuss in my current gold article, sentiment is reaching serious extremes.

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 my long position hedged at the moment.