All I can say is that it was quite a week in the precious metals market. Last weekend, I explained to my subscribers and to my readership on Seeking Alpha that we were near a market top, and to expect one last push up in the metals before a correction would ensue early last week.
Many of you have emailed me, and some have even asked in the comments section, if I offered real time warning of market tops and bottoms. In fact, in our trading room on Tuesday afternoon, we sold our short-term long positions in the metals into that last rally, and many aggressive traders among us even initiated short positions that afternoon.
A number of my subscribers seem to have made in excess of 500% profits in their short positions in just one day, based upon some of the notes sent to me, not to mention the multiples that we made since we called the bottom of the market at the end of 2011.
However, from many of the reports that have been posted over the last week, it seems that many people mistook this move up in the metals as a break-out of some sort, and many initiated larger position in the metals expecting further gains ahead. This is exactly the type of market psychology of which I warned against in the first article that I recently published on MarketWatch.
What "caused" this drop in silver?
I am sure many investors believe that it was Ben Bernanke that "caused" this drop in the metals. They point to his re-assertion that QE3 is not on the table now. But, how is this different than any other statement the Fed has made over the last year? What did Ben say that was so shocking that it should have "caused" such a significant sell off in the metals!? Was there any indication that anyone was expecting QE3, especially with all risk assets rallying so well into 2012? I don't think so.
I have a secret for you . . . it was not Mr. Bernanke's statement that "caused" silver to drop. In fact, silver had completed its fractal pattern, and was due for a correction. And, as people always do, they attempt to point to some news event that they think that caused the drop to make them feel better about not seeing the potential drop before it occurred. This is also when we hear the "manipulation" theories most prevalently. But, manipulation, news, or any other extra-market or exogenous event did not "cause" this market decline.
Let me try to explain this from a physics perspective. Until the times of R.N. Elliott, the world applied the Newtonian laws of physics as the analysis tool for the stock markets.
Basically, these laws provide that movement in the universe is caused by outside forces. Newton formulated these laws of external causality into his three laws of motion: 1 - a body at rest remains at rest unless acted upon by an external force; 2 - a body in motion remains in motion in a straight line unless acted upon by an external force; and 3 - for every action, there is an equal and opposite reaction.
Therefore, the financial analysis world applied Newton's first and second rules to a stock or a market and viewed it as moving in the same direction until it was impacted by some outside force, such as news, which caused it to change direction.
However, as Einstein stated:
During the second half of the nineteenth century new and revolutionary ideas were introduced into physics; they opened the way to a new philosophical view, differing from the mechanical one.
However, even though physics has moved away from the Newtonian viewpoint, financial market analysis has not.
Many services and financial commentators in newspapers persist in discussing current events as causes of advances and declines. They have available the daily news and market behavior. It is therefore a simple matter to fit one to the other. When news is absent and the market fluctuates, they say its behavior is "technical".Every now and then, some important event occurs. If London declines and New York advances, or vice versa, the commentators are befuddled. Mr. Bernard Baruch recently said that prosperity will be with us for several years "regardless of what is done or not done." Think that over.In the dark ages, the world was supposed to be flat. We persist in perpetuating similar delusions." R. N. Elliott, Natures Law, 1946
External events affect the markets only insofar as they are interpreted by the market participants. Yet, such interpretation has been guided by the prevalent social mood. Therefore, the important factor to understand is not the social events or news itself, but, rather, the underlying social mood which will provide the "spin" to an understanding of that external event. And, such was the case that seemed to have "caused" this drop in silver.
I would like to, once again, quote R.N. Elliott, when he stated that "[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."
So, what does this market now have in store for precious metals investors?
At this point in time, many have now forgotten that the CME has reduced margin requirements for the metals. In fact, many people pointed to the fact that the CME raised margin requirements that, in their mind, "caused" the market collapse thereafter. However, I wonder what their perspective would be now when they see the margin requirement reduction, and silver still exhibits a strong correction!?
In my humble opinion, this margin requirement reduction will offer tremendous fire power to the next rally, which can potentially be exceptionally strong. But, we must complete this correction before this rally is potentially seen.
My targets for this correction remain the same. Based upon the current pattern, which still may morph slightly, my ideal target range is the $31.90-$33.25 region in the futures to re-enter the silver market. While it still may even be possible that silver will drop to the .618 retracement region at the $30.50 region, I do not believe that this is the most likely possibility at this time.
The main factor I will be watching in the upcoming week or two will be the volume of selling exhibited in the next drop in silver. Ideally, I would want to see the next drop occur on less volume than the drop we saw on Wednesday, which would support the corrective nature of the current drop in silver. Therefore, if selling volume picks up in silver and our support levels do not hold, then I will re-asses my position.
Also, it has yet to be determined if the market will exceed the prior highs of 2011, or will top out at the $43-$46 region within the next month or so. Such a top, if confirmed by the pattern. at the $43-$46 region would present a shorting opportunity which would take silver back down to the $22 region, potentially as quickly as within a June timeframe. However, the market action in March should provide the appropriate guidance as to which pattern is playing out.
Disclosure: I am short SLV.