Is Silver Going To Go To New Lows?

Includes: SIL, SILJ, SLV, SLVP
by: Avi Gilburt

So, Syria is no longer an issue. The US dollar has been dropping. Taper, or not to taper . . . that is the next Fed question. But, how much of it really matters? In my humble opinion, none of it.

As I have said before, the metals were rallying well before Syria even came to the forefront. So, you really can't honestly look to that as a reason that the metals moved.

The US dollar was dropping on Wednesday and Thursday . . . and, guess what - so was silver. So, those that believe there is a direct correlation were, again, left holding the bag. Unfortunately, there is a lot less money in that bag due to their wrong expectations over the last two years.

And, this "taper" discussion is truly one of the most ridiculous topics, as related to silver, that I have ever heard. If I may be so bold as to quote myself from a prior article:

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.

Well, we are now in the midst of that "one more stab in the heart in store for the bulls" which I had envisioned weeks ago.

In some of the comments to my last article, a few readers attempted to go long silver based upon my expectation that another high may still be seen. But, I must caution those that attempt to trade what I write to not take any one sentence I say within a vacuum, but to understand everything I say.

Two weeks ago, as I saw a topping pattern approaching, I noted the following:

I will sell my shorter term calls and begin to layer in hedges [to my LEAPS] as we move into the 24.55-24.76 region.

But, I also noted that "the question is whether this will represent the top of wave iii, or all of this corrective rally." So, because I was unsure, I warned everyone to play this top more carefully.

So, I sold my short term long positions, and bought short positions. I also said that a corrective decline into the 23 region would get me to attempt another short term long position. But, last week, as we saw more of the pattern play out from the 23 region buying opportunity, I clearly stated, and re-stated:

As long as last week's low [23.04] remains intact, my expectations will be for you to hit at least the 25 region to as high as the 26.40 region for the silver futures . . . Any break down below last week's low would be a potentially bearish event from my perspective."

So, if someone reading my article bought the pullback on Monday around the 23.40 region, you would have had a risk of 40 cents. Your stop should have clearly been 23, which is just below last week's low.

Now, from some of the comments I saw on last week's article, it is clear that some did not understand this. Some felt that I was not clear, even though I stated twice that we will likely only see a new high as long as last week's low remains intact. When last week's low broke, that was the signal to get out.

But, if you traded this based upon my suggestions over the last month, you would have gone long on a small consolidation after we broke out several weeks ago, and then sold into my target region two weeks ago and bought shorts. You would have attempted one more short term long position, and then you would have gotten stopped out for a very small loss. But, since you should have had shorts for the expected larger decline, you should have had an amazing trading week, as I and all those that followed me on had, many even posting sizeable 5 figure profits last week alone.

So, my point in re-hashing this is to note that trading silver is not for everyone. And, if you chose to trade silver, you need to carefully follow the directions of one who does know how to trade silver. You cannot simply chose one statement in the directions while ignoring all the others, especially when a warning is repeated twice in the same article. Silver is very volatile and must be traded very carefully.

So, the question is now if we will see new lows in the metals? The answer is that it is quite likely. But, we will be watching for one more opportunity for silver to set up for another rally over 25 over the next week before it is able to make new lows. In Elliott Wave parlance, this means that the top of the prior rally was an a-wave, with this decline being a b-wave, which would set up a c-wave rally to another high over 25. In fact, such a structure can take us well over 30. However, the bad news of that structure would be that we would almost definitely see new lows after that. In other words, without reaching new lows over the next month or so, any rally that takes us over 25 before a new low is hit will only set up a bigger short trade.

The ideal support region for such a b-wave would be within the .618-.764 retrace of the August rally, which is 19.85-20.85. If the market can break down below that region, then new lows will be highly likely, and probably by October. My minimum target for such new lows would be the 17.76 level, but we can potentially see even lower depending on the particular set up at the time.

Now, for those of you who question why I cannot be absolutely certain that new lows will be seen, it is due to the nature of "corrective" waves as compared to "impulsive" waves. For example, we were able to sell into the last top rather accurately, as we went into that top with an impulsive pattern. They are quite predictable, and we can often target them rather well. However, corrective waves are much more variable and, thus, difficult to determine with certainty. Therefore, we have to rule out alternative patterns as we move through the last aspects of this corrective wave action since we hit out top in 2011. So, stay tuned.

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 SLV LEAPS, but also SLV intermediate term puts, which I purchased at the last highs.