Is silver making a bottom here?

Last time, I headed my post “Gold bugs squashed“, but the silver bulls have suffered even an greater percentage calamity.  As I outlined, we have been short both gold and silver since identifying the high in mid-April and have been fortunate to ride the waves down accumulating very large gains in a very short time (my ideal trading scenario!).

Today I will focus on the silver charts because I wish to make a case for the market to stage at least a decent rebound from yesterday’s lows.

While tracking the market from last December, I was able to identify the 15.50 low around Christmas time and to position long ahead of the strong advance into the late February high at the 18.50 zone where we took major profits.

When the market declined into March, I avoided trading simply because I was not confident I could pick the low.  I decided to wait for the charts to give me a firm signal to go long again.

This is the chart I used to pinpoint the high.  I had a lovely tramline pair working and the final extended wave 5 occurred on a strong momentum divergence.  Incidentally, commodity charts often display extended fifth waves (rarely in shares and share indexes).

Also of note, the high in wave 5 occurred on 1 March as the Dow was making its famous high, suggesting a correlation (but any idea of correlation was dashed last week as the Dow and silver went their separate ways).

The market finally broke below the lower tramline on 7 March, but I did not believe a short trade there would be very fruitful, since I expected a low nearby that would be the base for a resumption of the rally.  So when the market declined to the Fibonacci 62% support at the 1680 level, I started looking for a low-risk long entry.

Why did I believe a rally phase would start?  Simply because the long-range Elliott wave labels suggested the wave 5 high was wave 1 of what should be a five up and any dip was a correction in the new bull trend.

As March developed, this was the chart that gave my my buy signal

I has a minor pink trendline and set a buy stop just above it to take advantage of the rally that should come off the huge momentum divergence at the Fib 62% support.  And so it came to pass – a very strong rally that appeared very impulsive (in the same direction of the new uptrend).  All I had to do was to hang on, keeping Protective Stop (PS) at break even (just in case).

And as the market roared northwards in April, I started to note that bullish sentiment was getting out of hand and that gave me warning to start to look for a good exit.  I did not want to be anywhere near the masses of hedge funds that had built up extreme bullish positions when they started unloading.

The DSI reached over 80% bulls by mid-April and was making me nervous.  If the market did top out there, it would likely be a b wave in a corrective a-b-c.  This is the chart I used

Not only was the b wave high into strong Fibonacci 50% resistance, there was a large mom div and with bullish sentiment off the scale, odds really did strongly suggest the bull had run its course.  Time to take profits and position short in a complete reversal of stance.

As the market started to fall, it firmed up my wave labels with the decline being a c wave.  It was also likely the wave 2 in what should be a five up.  And when the market collapsed past the blue trendline, it was clear this was a major move.  Last week, it closed down on 12 consecutive days – a near record!  That is some very persistent hedge fund and ETF selling – and surprised me in its rapid move.

But is the market at or near a major low?  Many people are divided but I have noted there are few gold and silver bulls posting bullish articles, as they did up to mid-April.  One very prominent gold bug hasn’t mentioned them for a couple of weeks!

Here is a selection of yesterday’s headlines on seekingalpha.com

Gold to continue breaking lower

Sorry, bad action on gold

Gold under pressure

Gold and miners breaking down: cautionary sign

Not a single bullish article!  That’s potentially bullish! These types of articles go over  the facts of what has already happened and project that trend forwards.  Unless you are using a system of analysis similar to my Trading Trading methods, you are likely heading into a major reversal at the darkest time (for the bulls) – and that is usually the very best time to be a contrarian.

Here are my ideas that suggest we may well be at a major low.

Yesterday, the market has declined to the 1620 area which is on the Fibonacci 78% support level off the major December low on a very oversold momentum reading. .  In the chart, I have marked the points where similar low momentum levels have been attained.  These correspond to major lows in every case.  Point Number One.

Also, at the 1620 area, the wave c is about equal to 1.62 times wave a – a common Fibonacci relationship.  Point Number Two.

And yesterday, Daily Sentiment Index (DSI) had dropped from over 80% at the b wave high to just over 10% which is near the levels where major lows are found.  Point Number Three.

Of course, nothing is certain when forecasting future market moves, and gold/silver may well continue heading south next week.  That is entirely possible.  But if the above ideas are correct and I get a firm buy signal, it will shock an awful lot of newly-converted bears.

Here is the COT data as of 2 May as the market was in free-fall

At the April high, hedgies were about five-to-one bullish – and extreme.  But after a $2 rapid decline, the non-commercials had only reduced their longs by less than 20% (retail traders had bought into the decline).  Meanwhile, the commercials (smart money) were lifting some of their profitable shorts on the way down.

Maybe the hedgies need to throw in a few more towels before the low is in, so there may be some more bearish potential

Naturally, catching a falling knife can be hazardous to your wealth, so I will wait for a reliable buy signal before advising VIP Traders Club members on their next move.  But so far this year, we have been on the right side of the major moves – and have taken significant profits along the way.

If you wish to follow my trades in real time in gold/silver and many other markets, join my VIP Traders Club – details here.