Searching for a Silver Exit Strategy

The Silver Elliott Puzzle: Well, it is not a puzzle really, but in the search for a silver exit strategy, we occasionally come across rocks in the road which make us wonder "Will this or that happen?"

I always say that fundamental and technical analysis are complementary, and not opposing tools, in the search for silver and gold profits. The fundamentals point you in the general long term direction, but technical analysis helps negotiate the bends and dips on the road.

I use Elliott Wave analysis on some aspects of silver, but knowing how really right it can be when you get the wave count right, or how really wrong it can be when you get the wave count wrong, it does not occupy prime position in the tool box.

However, in a recent article, I showed the previous run-ups in silver in 2004 and 2006. The wipeout zone indicates how much money you will lose if you treat silver like a rollercoaster ride i.e. you inadvertently decide to ride the ups AND the downs.

Before such a drop, we have what is called a wave 5 event. This wave 5 is the final rise in the silver price before the whole price surge ends, to make way for a sizeable correction. A wave is easy to find in hindsight (not surprisingly) but it can offer insights into what happens for similar silver price runs in the future. That is the theory anyway. So with hindsight, I added wave 5 and the previous correction (wave 4) to the charts below.

I also include the sub wave counts ABC and 1234 to show you the harmony and symmetry behind the Elliott Wave system.

click to enlarge

Note the channel formation and how silver quickly sold off once each channel had broken to the downside. Always keep a lookout for developing channel patterns, simply because armies of silver traders and investors will be too! Talk about a self-fulfilling prophecy.

But I draw your attention to something which has got me scratching my pate about a coming price spike. Note that in 2004, wave 5 put on a good show and advanced well ahead of wave 3. However, wave 5 in the 2006 spike hardly got above the highs of wave 3 (40 cents over). It hardly seemed worth riding wave 5 in 2006, but there was all to play for in 2004.

In 2004, wave 3 rose $1.80 and wave 5 did $2.08, so wave 5 was 15% greater than wave 3.

In 2006, wave 3 rose $5.60 and wave 5 did about $1.80, so wave 3 was 311% greater than wave 5!

Clearly, it would be nice to know which scenario will pan out for this leg up in silver. I think an answer may lie in the vicious correction that ensued for wave 4 in 2006. On the 20th April, wave 4 dropped $14.37 down to $11.92 for a bone crunching $2.45 drop or 17% down! Someone may correct me here, but I do believe that was the worst one day drop in this silver bull market thus far. We have not had a dollar up day yet, but we have managed a two dollar down day just to remind investors that the silver bull is not easily tamed.

So my theory would be that this mega-drop so spooked investors that, though it did not end the bull run, it took enough money off the table to ensure the final wave 5 was stunted in its move up. In fact the U.S. dollar index was still dropping rapidly at that time, but even this wasn't enough to coax investors back in sufficient numbers.

So investor psychology meets Elliott Wave. If our wave 4 correction is relatively benign (as in 2004), we can hope for a big run on wave 5. However, a short sharp silver shock (try saying that rapidly) may again drive investors away and cap our final silver move. Only time will tell which scenario plays out in the end.