Silver Takes a Much-Needed Breath - David Brady (05/09/2019)

September 05, 2019

Yesterday I posted the following tweet:

This is what happened so far this morning:

Silver has enjoyed a spectacular rally since its low of 14.27 on May 28. Trough to peak, it rose 27% in just three months. Everyone and their dog became bullish. To suggest even a short-term pullback was blasphemy. But “Nothing goes up in a straight line forever” and “The crowd is typically wrong in the short-term.” Positioning, sentiment, and technical data had all reached extremes not seen since the peaks in 2016 and 2011. It was only a matter of time before we got a sizeable pullback.

So rather than dwell on the past, now that we have finally got a decent drop and irrational expectations are being reset, where could we go from here?

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. Such pullbacks are a normal and healthy component of all bull markets. This should be considered a good thing. It enables those who missed out on the initial rally to be able to buy in at a lower level. It also allows those that bought low and took profits on the break of support this morning to buy back lower.

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 (4) bounce and that we have another wave (5) 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.

Absent the worst-case, I am looking for a wave iii of 3 to follow any downside over the next few weeks or months targeting 50 or higher thereafter.

As for Gold, when many were calling for the Gold:Silver ratio (“GSR”) to go to 100 or more back in June, I wrote that I believed that 96 was more likely a historic peak and that Silver would outperform Gold for the foreseeable future. We’ve had a tremendous move down to 78 so far, but now we may be a wave 4 bounce before lower again. This would mean that Gold falls in line with Silver, but to a lesser extent to begin with, then passes it by on the downside.

The support to watch in Gold is the 1490-1502 zone. Gold needs to hold this to avoid a deeper drop to 1400 next.

Miners signaled this move lower was coming. They have lagged Gold and Silver on this latest move up. The possibility of one more wave (5) higher high in both metals and miners remains, but as I shared last week, the short-term risk / reward is becoming more skewed to the downside, imho.

As long as 1267 in Gold and 16.20 in Silver hold, I am looking for far higher prices ahead that take both metals to new record highs in 2020 and beyond.