Much of our call for silver’s breakdown was based on what were very bearish COT Charts. We made a lot of money on the downturn in silver from the top but given the massive decline on Friday and the major US dollar reversal, I wanted to close positions going into the weekend in order to study the latest COR figures to make sure that we are still on the right side of the trade here. Better to take money off the table and review the situation with no position on. This makes it much less stressful. Also, if we are witnessing the start of a major leg down in the precious metals and the broader stock markets and a new major rally up in the US dollar then there will be plenty of opportunity to play these moves. We don’t want any weekend surprises eating away at our options so better to re-enter Monday or even Tuesday. So with that said, the latest COT charts remain quite bearish for silver implying that the commercials are still heavy net short. This is not a good sign for anyone long silver at the moment as it implies much more downside potential for silver. The chart shows little change from the initial one I posted back on October 15th. That is, despite the fact silver is down over $4.00 from the October high, the net spec longs are still massive as are the commercial shorts. In layman’s terms, the bleeding is far from over which makes me lean strongly to initiating another short position using December $28.00 SLV Puts although as of the time of writing this on Saturday afternoon, my strike price is still unknown. We may very well see a complete breakdown to test the old lows of $26.15 and my gosh will this get ugly if we were to breach that low as my longer term massive head and shoulder’s topping pattern posted the other day showed.
There is also a very ominous sign that is taking shape as it relates to gold. Gold priced in Euros has been a very strong indicator for the price movement of gold of late. As I posted early Friday, EuroGold is making what is clearly a head and shoulders topping pattern which might not only signify that gold itself is on the very of coming down in price, significantly, but that it might have made a major top. It has been 18 months since silver crashed of its high. It has been a year since gold crashed off its all time high. Neither metal has shown any sustainable rally that would lead me to indicate that they are going to make any significant move to new highs anytime soon. In fact, we might fairly be able to label silver’s action of late as continued countertrend “bounces” in a bear market started last May 2011 and for gold, the same might apply from last October, that is, that what we have been witnessing are bounces in a downtrend. Here’s the Eurogold chart.:
What happens Monday is anyone’s guess and we won’t know until the Asian markets open on Sunday night. However, in my opinion,, what happens Monday does not change the larger view that we may be just at the beginning of a major US dollar rally that will send equities and precious metals down. (So much for the death of the dollar eh?). There will be plenty of opportunity to play this expected move down and profit from it. However, there is also the real chance that silver, more than gold, has greater downside potential as it appears to have entered a 3rd degree or possibly a C Wave down and as I indicated at the start of Friday’s trading, C Waves are usually the most violent as they often contain quick and sharp price drops.
I will have more opinions on this subject as the picture becomes clearer. For the time being, I would want to try and catch what appears to be a falling knife so for the time being, if you are going to trade the metals, look for short side set-ups and forget going long for now. There will be opportunity to go long at much cheaper prices. Never marry yourself to any asset no matter how much you like it or what your bigger perspective is. Separate your emotion from your trading. Don’t ignore the warning signs that are there and that reared their ugly head mid October. $26.00 silver is not out of the question and in my own opinion is a very real target. Lower prices are not out of the question until the technical picture for the white metal improve dramatically. I’ll look to Sunday night or Monday morning for more guidance.
