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The diminution in silver's downside momentum and the
massive contradiction between our earlier bearish interpretation of the
charts, and the strongly bullish COTs and sentiment indicators forces us today
to reconsider the charts and ponder other possibilities, for we cannot afford
to be on the wrong side of the trade in this commodity. Fortunately we are
still ahead of the curve as silver has yet to "tip its hand", but
it doesn't look like it will be long now before it does.
So today we are going to consider two wildly different
scenarios, the bearish one detailed in the last update, which may yet come to
pass if deflation gains the upper hand, and the bullish one which will take
hold if Europe is saved shortly and we get back to "business as
usual", i.e. building the debt and derivative mountains to ever greater
heights. Right now everything is hanging in the balance - it could tip either
way, but as we will shortly see it would appear that Smart Money is betting
on the return to business as usual, and as they make money, by definition, we
are perfectly happy doing what they do, if we can figure it out, that is.
The reason that we were wary, and are still mindful of
the position of the exits, is that a large potential Head-and-Shoulders top
pattern has formed in silver, as we can see on our 2-year "Scenario
1" chart for silver, which is much the same as the one shown in the last
update. The support shown at the bottom of this pattern is clearly of massive
importance with the price staging major reversals 3 times at it, so failure
of this support, which would signify a breakdown from the H&S top, would
be a very bearish development that could be expected to lead to a severe
drop. If this scenario eventuates it would signify the onset of a
deflationary downwave, such as would be
precipitated by the failure of one or more major banks in Europe, leading to
a chain reaction and a run on the banks. This is possible, but as mentioned
above, it does not appear to be what Big Money is betting on. From a
practical standpoint the one key conclusion that we should draw from this
chart is that all long positions in silver should be closed out, or at least
hedged, in the event of a break below the neckline support of the H&S
pattern.
 
We have until now concentrated on this
Head-and-Shoulders thesis and not really considered the possibility that the
entire reaction from the April high, which was a downtrend bounded by
parallel trend boundaries, is quietly morphing into a strongly bullish
Falling Wedge, as shown on our 2-year "Scenario 2" chart below.
This became more apparent just last Thursday when the upper boundary of this
proposed Wedge shaped channel forced the price to reverse yet again, giving
added validity to the steeper downtrend line in force from September.
Additional bullish factors associated with this Wedge are the fact that it is
fast closing up just above the zone of strong support, plus the fact that
volume has died back to a low level compared to most of last year, as
remaining fed up silver investors fold their tent and call it a day. This is
the stuff of which great rallies are born, particularly when it coincides
with very low levels of bullish sentiment and COTs showing record bullish
readings.
What is wonderful about the current setup is that it is
not necessary to know for sure, or almost sure, what silver's next big move
will be, to turn this situation massively to your advantage, because of the
current highly advantageous risk/reward setup for traders going long silver
here. We know that if silver breaks down below the critical support level
shown it's curtains - it will likely plunge, so we also know to get out (or
hedge) if that happens and position stops accordingly - not too close though
to avoid Big Money shaking you out in an organized raid. On the other hand,
after its long and brutal decline from its highs of last April, silver is washed
out and oversold, with public interest in it now at a low ebb - sentiment is
close to rock bottom and the COT structure is at its most positive for silver
pretty much since records began, so if ever there was a time to stick your
neck out, this is it. Here's the clincher - because silver is so close to
crucial support you can "back up the truck" here knowing that you
can get out for a relatively small loss if if it
moves against you and breaks down, triggering nearby protective stops. So by
buying here, or soon if it reacts somewhat next week
as looks likely, you can position yourself for a potentially humongous
uptrend, knowing that you are out for a small loss if it doesn't work. The
cherry on the cake will be if we see a minor reaction over the next week or
two back towards the support, that would optimize
the risk/reward. We should however be careful of trying to cut it too fine,
as it would be an awful shame to miss a massive uptrend all because of trying
to buy 30 cents cheaper. The way to handle this is to angle for the
short-term reaction, but be ready to chase after it in 10 league boots if it
instead breaks out above the upper trendline, which
is likely to lead to a powerful rally. Whatever, do
not forget the stop beneath the support. As with gold, an actual stop level
is not given here to avoid Big Money getting hold of the info and running you
out of your positions "for a bit of sport" with an intraday plunge
that later reverses.
The latest long-term COT chart, courtesy of
www.sentimentrader.com, shows that the Commercials' net position is at it most bullish ever. Within this, however, there was a marked
increase in their short positions as of last Tuesday, which is a reason why
we are expecting a short-term reaction. Large and Small specs have largely
lost interest in silver, which is of course very bullish.
The chart showing public opinion on silver was at its
most negative ever about a week ago - even worse than in the darkest days of
2008 - although it recovered somewhat this past week. This is also clearly
very bullish, as the last thing you want to see is public enthusiasm for
something you are buying - you want that when you come to sell it.
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