Silver: Don't Get Too Bullish Just Yet

Aug.18.13 | About: iShares Silver (SLV)

Silver has now rallied approximately $5 off its lows, and everyone seems to be getting excited that the absolute lows are in. Burned bulls seem to be feeling their oats once again, although many seem to be a bit more skittish at this time, and rightfully so.

But as we discussed last time, welcome to Bizzaro-world if you are attempting analyze the fundamentals in the metals. More and more discussions are being publicized about the Fed's "tapering" of QE, yet the metals are rallying.

So now I can honestly say that I have heard everything when it comes to reasons as to why the metals are rallying. People are actually claiming that the metals are reacting to the fact that the Fed is really not going to taper at all. Rather, they will keep QE in place, and that is what is causing this rally in the metals.

This makes me scratch my head in absolute amazement and disbelief. Let me see if I really understand this argument. First, QE-Infinity was announced, and, as I prognosticated, silver entered into a sizable decline - even larger than I had initially expected. So, it clearly did not rally on QE. But now the argument is that the Fed will really not take away QE, and supposedly that is what is making the metals rally? Excuse me, but HUH?

I am seriously hoping those of you that actually use their minds can see through this ridiculous line of "reasoning." QE does not cause the metals to rally, but not taking it away will? Maybe if I had that lobotomy, this would make sense to me. But, thank goodness my mind is still functioning quite well, and I can see how desperate people have gotten in their desire to see the metals rally. Or I can simply reiterate that it is not a "reason" that makes metals rally, but as I have been saying for years, it is sentiment that moves metals, and sentiment is approaching levels that can support a much larger rally in the metals. But I still think there may be one more stab in the heart in store for the bulls.

But what the metals did do was break through the line of resistance I cited, and, as I presented, the next target was going to be the 23 region, which is exactly where we find ourselves right now. So, where is silver going from here?

Well, if you ask most silver "followers," their answer usually depends on their entrenched perspective on the metals. Most of the staunch bearish perspectives did not see this rally coming, while the staunch bullish perspectives only see silver going to the moon at this time.

However, markets do not work like that, and they certainly do not move in a straight line. Therefore, the truth may lie somewhere in between, which will cause pain to both extreme views. So, in truth, following anyone with an entrenched perspective on metals will never help you follow how the metals really move.

So as long as silver can move through the 24 region, and not break down below the 21.70 region (and preferably maintain support over 22.50), then I believe we can target the 25-27 region we have been so long awaiting within this corrective rally we have been expecting.

Now, I would like to take you all back to a point in time last year when silver rallied almost 10 dollars between June and September in what seemed like a parabolic move. Everyone and their mother thought I was crazy for viewing that rally as a corrective rally, setting up another decline. And the reason I called it a corrective rally was that the start of that rally lacked a pattern, which told me that the bottom was in.

Well, here we are a year later, and I find myself in the exact same scenario. We have the possibility that silver will again rally almost 10 dollars off its low, and many have become bullish on the metals once again. And I may again be the lone voice looking for as high as the 27 region, only to be followed by a decline to a minimum target of the 17.75 region, since the start of the rally did not develop a structure, which marked a clear bottom.

However, I will remain open to the possibility that the move off the last lows was a more rare type of structure that could mark the bottom, but there is a lot that silver will have to prove to me to change to that perspective. Until such time, my primary expectation at this time is that another low will likely be seen into the fall before the real rally begins.

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.