Originally published February 10th, 2013.
In the last update we called a bottom in silver the day after it put in a high-volume bull hammer early in January, and while it did reverse as expected, the short-term uptrend that developed has since stalled out in recent weeks and it now looks like it is about to reverse to the downside again.
On silver's 6-month chart we can see how the price has advanced out of the intermediate base area that formed late in December and early in January, and also how the advance has fizzled out so that another top area appears to have developed, and with the price on the uptrend line it looks like it will break below it soon, or immediately, and in so doing reverse to the downside again. The advance out of the base was anemic and the price has fallen way short of making it to the upper boundary of the larger downtrend channel, which is an ominous sign. There is still an outside chance that it could now do so - although the latest COTs offer no comfort for bulls here.
If the price does now break down from the minor uptrend its first stop will be the support near the late December - early January lows, and if it breaks below this support it next port of call will be support in the $28 - $28.50 area.
We can see the long-term uptrend in silver on its 7-year chart. On this chart we can also see that there is very strong support at the multiple lows of the past 18 months, at and just above $26, which also happens to be very close to the support of its long-term uptrend line. A dip into this zone will be the point at which to buy silver (in the approx. $26 - $27.50 area circled in green) for the next major upleg, and the proximity of a very clearly defined strong support level affords a very favorable risk/reward ratio, as a protective stop can be set just below it.
If silver does go on to break down below the strong support level at $26, it will be very bad news indeed, as such a development could be expected to trigger a brutal plunge, and there is a scenario in which this could occur as set out in more detail in the parallel Gold Market update.
The Fed must be desperate to support the beleaguered dollar and Treasury market, and it can be presumed that they will stop at nothing to do so. A highly effective way to achieve this objective would be to create a deflationary scare and an exodus out of commodities and stocks, with the hot money panicking into the dollar and Treasuries again, which tactic has the added advantage that they can later claim that only another massive infusion of QE will save the economy from ending up on the rocks again, although the reality is that it never got off them. Various COT charts show that the Commercials will be prime beneficiaries of such a scenario, should it unfold, which of course makes it that much more likely, since they are seldom losers.
The latest silver COT chart should strike fear into the hearts of silver longs, although it usually doesn't because they either don't understand it or ignore it, preferring instead to march to the drumbeat of their favorite cheerleaders, one of whom recently described silver as "being on the precipice of a massive (upside) breakout", a choice of words that could come back to haunt him.
