“…the risk-reward favors further downside in Silver…”
In my September 5th article entitled “Silver Takes a Much-Needed Breath”, I stated the following:
There are three possible scenarios I am watching. The highest probability scenario is that this is just a wave (4) pullback and we continue higher again in wave (5) to ~21 before we begin a wave ii reversal.
Wave (4) should be a 3-wave A-B-C structure, with wave A down, B up, and C down to finish. A reasonable target for the bottom of wave (4) would be 17.40-50. This is the prior high and resistance, now support, on August 13. It also happens to represent a ~38.2% Fibonacci retracement. 50% would be 17-17.20 and closer to the 50-day moving average.
If this is a wave (4) and we find support in the 17s, then wave (5) is likely to take us up north of 20 and likely a new high above the 2016 peak of 21.23 before we begin wave ii lower.
The second scenario is that we just completed 5 waves up for all of wave i of 3 and now we’re heading down in wave ii. In order to correct the extreme positioning, bullishness, and overbought condition, Silver could drop as far as 16.20, even 15, before bottoming out and heading up in wave iii of 3 next.
The worst-case scenario—and I stress “worst-case”—is that this entire rally since the low in December 2015 is just an ABC corrective wave IV bounce and that we have another wave V down to lower lows to complete the bear market that began in April 2011. Under such circumstances, the rally off the low in November 2018 would be an A-B-C instead of a 1-2-3 above. For that to be viable, we would need to see a break of the wave 1/A peak at 16.20. Confirmation would require a new low below 13.26.
This is a very low probability scenario right now, but I’m throwing it out there as a possibility to watch, especially if we break 16.20.
~17.50 proved to be the low, exactly as forecast, but since then we have hit a lower high of 18.81. Scenario 1 (“S1”) may still be intact and wave (4) is just deeper than expected, targeting 16.50 in an ABC move lower where A=C in size before heading up again in wave (5). If so, the C wave down to 16.50 is under way now and we just completed wave i to 17.80. Resistance for the wave ii bounce is at 18.19, the 38.2% Fib, or 18.42, the 61.8% Fib, before lower again in wave iii of C. In this scenario, we cannot go below 16.20 as this would violate the peak of wave 1 and we would have to consider S2 and S3 instead.
If S2 is playing out and wave i of 3 completed at 19.75 and this is wave ii, we could fall all the way back down to ~15, the 85.4% Fib of wave i, before wave iii of 3 begins. A break of 15 would bring S3 into play, the worst-case scenario.
If 15 is broken in S3, described above, then new lower lows below the low of 13.62 in December 2015 are likely. I have to stress again that this is the worst-case scenario. In order for this to become a higher probability scenario, we would need to see supports at 17.50, 16.50, 16.20, the 200-day moving average (15.75), 15, and 14.27 broken. We’re a long way from that outcome yet, but it is a possibility, hence I share it here.
My primary scenario remains S1 unless 16.50 is broken, with confirmation below 16.20, then I would switch to S2. Only a break of 15 with confirmation below 14.27 would make me consider S3.
I have been saying for many weeks now that extremes in the weekly technicals, sentiment, and positioning, rivaling or exceeding those at the peaks in 2016 and 2011, would ultimately lead to a significant pullback. Unfortunately, we have barely made a dent in those extremes so far…
From a fundamental perspective, as I shared last week, I don’t believe we will see the Fed revert to QE unless we get a crash in equities first: “No crash, no QE.” If equities rise, the likelihood of QE falls even further. If they do fall, the rising risk of deflation could weigh on Silver as it did in 2008.
Until the prospect of QE increases substantially and the extremes we’re seeing in the data are corrected to a greater degree, the risk-reward favors further downside in Silver, imho. That said, I believe this will provide perhaps the greatest buying opportunity in Silver ever. Given the unsustainable debt load in the U.S. that can never be repaid, pending recession, exploding deficits, and unfunded liabilities coming due, it is only a matter of time before the Fed is forced to revert to QE as the buyer of last resort for U.S. debt that no one else wants. When it does, I expect the dollar to fall and Silver to soar to unimaginable heights. It’s inevitable, imho.