Originally published October 7th, 2012.
A bloodbath is believed to be imminent in the silver market, now that its cheerleaders have herded their flocks into the corral, ready to be fleeced again.
In the last update posted early last week, we expressed the view that an intermediate top was forming in gold and silver, a view that is reinforced further by the inability of both metals to break higher later in the week, and the now towering Commercial short position in silver as revealed by the latest COTs.
On its 6-month chart we can see how silver has continued to track sideways beneath a resistance level approaching $35. It had a go at breaking out upside on Thursday when the dollar apparently broke down, but failed, and weakened again on Friday. If we look carefully at this chart we can see that, following failure of the steep uptrend that began in the middle of August, a potential Double Top is completing beneath this resistance that portends a drop, and we have already observed several bearish candlesticks with long upper shadows developing beneath the resistance, which is a big reason why we turned bearish. Failure of the support level shown, which is probably imminent, can be expected to lead to a brutal plunge.
Although it is clear that it might be at an intermediate peak, silver doesn't actually look too bad on its 3-year chart - its moving averages are swinging into bullish alignment, and just going on this chart it looks like it might be consolidating before going on to take out the resistance and continue higher, so why are we so bearish on it near-term? The main reason is the massive, staggering short position built up by the Commercials that we will look at lower down the page, which is thought to relate to a possible surprise big rally by the dollar, the potential for which we examine in the parallel Gold Market update.
The silver COT chart was already showing extreme readings at the time of the last update, but last week Commercial short positions exploded to even higher levels. Their short positions are now way in excess of those they held before the onset of the severe downtrend of last Spring and also immediately before the vertical plunge of September last year. This massive towering Commercial short position portends an imminent plunge in the silver price.
Some of you may recall that it was consideration of such factors that led us to predict the savage plunge in silver just days ahead of time in September of last year, and we positioned ourselves to garner massive profits from this plunge while others were wiped out in a matter of days.
While, as ever, past performance is no guarantee of future performance, silver looks set up for a possibly brutal plunge soon. More sophisticated traders who examine the 6-month chart for silver presented here will clock the massively advantageous risk/reward ratio for silver shorts here, since any newly opened short position can be protected with a close overhead stop that strictly limits losses if silver breaks higher. To put it bluntly - if we are wrong in shorting silver here, we are out for a minor loss, if you are wrong here as a new long, you are going to have your head handed to you on a platter.