Should You Buy Silver Now? Probably Not.

Includes: AGQ, SLV, ZSL
by: Avi Gilburt

Although currently not as heavily discussed as gold, silver has had quite a volatile run over the last several years. In fact, it was just $9 a couple of years ago, and, now, even after a major correction, is still over 4 times higher.

Back in April of 2011, silver hit a top close to $50, and proceeded to have a very steep decline that brought it all the way down to $32 level in a matter of a week. For the last several months since, silver has significantly underperformed gold.

Silver is actually at a very interesting juncture right now, where it can either have a breakout, and exceed its prior high, or it can break down to levels below 37.00.

So what is the silver price action telling us at this time? Has silver “completed” its correction and beginning a bull run? The answer is, most probably, “no.”

Larger Elliott Wave Count Perspective

From a longer term perspective, whether silver will ultimately see higher highs will depend on your view of the Elliott Wave Count. You can view the prior high in silver as only a Wave 3 top, whereas many Elliotticians view it as a multi-year Wave 5 top.

Even for those Elliotticians who believe that silver has only completed a Wave 3 top, the question still remains if silver has completed its Wave 4 correction, or if there is still a larger decline yet to come.

For the purposes of this article, I am going to assume that silver has only completed its 3rd wave high, and is currently in a 4th wave pattern. Based upon this count, silver can still have at least one more larger decline yet to come, before making a run at new highs.

However, if the top of Wave 5 is in, then silver will not maintain my below cited support levels, which would then confirm that all 5 waves up have been completed.

Under any of the scenarios, I still believe that silver could experience an upcoming decline.

Current Elliott Wave Count

click to enlarge

Click to enlarge

If you look at the above chart, you will see that I currently have silver in an uptrend channel. In fact, I have a bullish count applied to the silver price action, in addition to a potential bearish count, as well.

My personal preference is the bearish count, and I will explain what price action we would need to see to prove me wrong. Since the bullish perspective places silver in a potential Wave 3 of Wave (3), which is the most powerful phase of a 5 wave rally, I am simply not seeing the volume confirmation for this to be a Wave (3). Hence, my bearish preference.

My Primary count puts silver in its Wave 2 of a Wave (c) of a 4th wave correction. What this means is that silver has completed its first wave down in Wave (c) of its 4th wave correction, and is now retracing up in a Wave 2, before beginning a strong down trend.

Since Wave 2’s are usually 3 wave events, marked a-b-c, I am looking for a potential top in silver between the 42.00-42.90 level in the silver futures, which would be the Fibonacci .618-.764 retracement of the initial decline. It is from that level that silver could begin its wave 3 decline.

Downside Targets

According to Elliott, as presented by Frost & Prechter, 4th waves will usually target the level of the 4th wave of one lesser degree. Furthermore, Elliott also pointed out that when we see an extended 5th wave, as we did in the prior silver rally, the 4th wave decline will usually find support at the level of the bottom of Wave 2 of the preceding extended 5th wave.

Therefore, this would make my targets for a bottom of this Wave (c) of the 4th wave either the 33.50 support level (Wave 2 low of the extended 5th wave – and prior Wave (a) general support base), or as low as the 26.80 level, which is the level of the 4th wave of one lesser degree.

Furthermore, since Waves (a) and (c) tend to exhibit some form of Fibonacci relationship, we will usually see a .618 or 1.00 Fibonacci relationship between the two waves. Therefore, based upon the prior 50.00 high in silver and a 32.25 region low, the 33.50 region is the .618 Fibonacci extension of Wave (a) from the current top of Wave (b), and the 26.80 region is the 1.00 Fibonacci extension of Wave (a) from the current top of Wave (b). This usually provides further supportive evidence of our downside pricing targets

Invalidation of Bearish Pattern – Bullish Scenario

Assuming that I am wrong with my bearish perspective, then I would be expecting the volume in silver to begin to significantly rise, along with exceeding the 42.90 upside price target for the bearish Wave 2 count. Confirmation comes in silver taking out the prior high over 44.30 in the futures, along with rising volume, with a potential target in the 50.00 region for a wave (3).

“Top Is In” Scenario

In the even that silver does not find support at the 26.80 region, then it would be the first indication that the multi-year top is in for silver, and much lower levels are being targeted.

Fundamental Picture

The fundamental picture supports the technical picture as well. Currently, the latest COT report shows that silver has the largest commercial short position since April 2011, just before silver had its large plunge in May 2011. Additionally, most of the recent articles I have read (here; here; here; here, and here) on silver provide evidence that many people have been talking up the bullish aspects of silver at this time. When we have an overly bullish market, and especially an overly bullish investment advisor group, then we all know what usually happens.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in SLV over the next 72 hours.