Silver: Do We Have One More High Coming?

Includes: SLV
by: Avi Gilburt

From a sentiment standpoint, I am seeing way too many analysts and traders calling the low in the metals already being in place. Bullishness is seeming to come back into vogue in the metals world. But, this bullishness seems to be quite premature from my perspective, as I see nothing yet that is telling me the lows in the metals have been seen. Maybe I am a bit slower than others, but I remain very cautious at this time and am not yet ready to adopt that perspective just because we see a several week rally.

While some of you have questioned my use of Elliott Wave to make market calls, I think I have provided enough fairly accurate targets on the way up and the way down that you would think some of the doubters would finally recognize the formidable utility of Elliott Wave analysis, especially when used to analyze the metals.

But, as Ben Franklin once said "Geese are but Geese tho' we may think 'em Swans; and Truth will be Truth tho' it sometimes prove mortifying and distasteful." So, while many find it hard to believe that Elliott Wave actually works or simply have a hard time accepting something they do not understand, "truth will be truth," though you may find it distasteful or incomprehensible.

If you are being intellectually honest, you cannot dismiss how often Elliott Wave points us in the correct direction as to what the market will likely do in its next move, and very often even gives us very accurate targets at which the market will turn. While I have never claimed that I will always be correct, or will always have a clear bias, it should be evident to those that are honest and follow me closely that it has served us better than any other analysis methodology over the last two years that I have been writing on Seeking Alpha.

Last week, I noted the following:

However, due the smaller time frame pattern, I am going to suggest exiting your short term trading long positions as we move into the 24.55-24.76 region (assuming no extensions become evident into that region), and allow the market to prove to us that it is wants to consolidate in a multiple-day wave iv before re-entering for a wave v rally. A breakdown below the 22.20 level would indicate to me that the trap door may be opening and having us target the 17.75 level next.

Last week, silver provided us a small extension just beyond my topping region, and has begun what is likely a minor degree correction. But, before I go into my market expectations for the next week or so, allow me to digress and provide you a real-time example of why Elliott Wave analysis is one of the most powerful tools you can use in your trading arsenal.

Around 2PM on Tuesday, someone in our Trading Room at mentioned that John Kerry was scheduled to have a press conference regarding Syria. Just before 3PM, I asked if Kerry had spoken yet, since the "set up is here for him to be a catalyst to tank the market!! But, he better get on the mic right now!!" That is an exact quote of mine made on the site. Well, as we now know, about 15-20 minutes later, the market began the heart of its 40+ point decline.

Now, those of you that know me know that I do not trade based upon fundamentals or news. Rather, I use Elliott Wave analysis, supported by technical indicators and Fibonacci Pinball. In fact, I do not listen to any news at all when I trade. So, I am sure that leaves you questioning the post I mentioned in the paragraph above.

Well, R.N. Elliott stated "[a]t best, news is the tardy recognition of forces that have already been at work for some time and is startling only to those unaware of the trend." As long as you know the position of the market within the trend, a supposed "reaction" to a news event should not shock you.

With the market set up in a precariously dangerous pattern, and about to embark upon a strong move down, the market was clearly in a very bearish posture. So, when someone in our Trading Room at mentioned that John Kerry was about to make some form of announcement in a press conference, it was not too hard to foresee that he was likely going to be the "catalyst" to which everyone was going to point regarding the decline which was clearly about to occur. In fact, this was the same decline which I told my subscribers on to expect last week, as long as we remained below the 1670ES resistance. And, I did not know about this press conference last week when I called for this decline (as long as we remained below 1670ES).

And, yes, situations like this happen more times now than I can count, but people still believe it is actually what is said that makes the difference. In truth, it did not matter what Kerry said, the market was set up for a decline in a bearish posture.

Back in the 1940's, R. N. Elliott urged market participants to move away from Newtonian-based analysis and to take the view that external events affect the market only insofar as they are interpreted by the market participants. Such interpretation is guided by the prevalent social mood internalized by the investor community as a whole. Therefore, the important factor to understand is not the social event itself, such as the news, fundamentals, or the earnings, but, rather, the underlying social mood which will provide the "spin" to an understanding of that external event or information.

In our case, the market was set up in a negative posture, which, to me, meant that it was ripe for a decline. So, notice I did not say that Kerry better come to the mic to say something specific or negative. Rather, just him coming to the mic, no matter what he said, was bound to be interpreted by the market participants as negative, and seemingly "cause" the market decline which we expected before we even knew he was about to speak. Think about it, doesn't this also provide a simple reason as to why markets will often drop on good news or rise on bad news?

I know this is very counter-intuitive to most readers, but the more you learn about this perspective, the more it will simply amaze you and transform your ability to identify the appropriate trend, as well as the turning points in all markets and stocks that you follow. It will help you discern when the market will "buy the news," or when it will "sell the news" before the news comes out.

As for what to expect over the next week or so in silver, well as of the close on Friday, silver has almost completed a corrective drop towards the 23 region. While a rally can begin from the 23 region to take us to new highs, and our ideal target of 26-27, I suspect that all we will see will be a corrective rally, which will still set up one more drop for silver to my ideal target region between 22.25-22.95.

So, for anyone who still would like to trade silver towards the 26-27 region, you could consider a buy in the 23 region, with a stop around the 22 region. But, I would likely only buy a half position on this trade, as it is still likely you can see a lower level within the next few weeks before the rally towards 26-27. Any break down below the 22 level invalidates this perspective, and has me looking towards the 17.75 region next.

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 LEAPS in SLV, as well as an intermediate term hedge with SLV puts.