Silver

Silver was another great call of mine that I botched trading:

The arrow shows where I shorted. The brown bar shows where I had my stop set! Ended up losing quite a bit of money when had I traded it properly I could have financed a year of retirement. Live and learn. At the time I was not wave counting. I made the short based on sentiment. It was a good indicator but not wave counting and having never traded the top of a parabolic before I was pretty much doomed. Whether my stop was going to get hit or not was just a question of luck.

Meanwhile, I am now bullish on silver. The wave pattern is satisfying. The A wave was a clean 5 wave drop. The B and C waves are only clear in retrospect. It would have been impossible I think to parse them in action. I can only do so now with confidence because the blue line is making a crystal clear motive wave. The key here is that the C wave is a bearish diagonal triangle. Considering the support at 32 it's not unexpected. That's where the parabolic started so one would expect a wave pattern that reflected strong support.

I believe there will be two buying opportunities in the 33.60 range and then silver will be off to the races, sort of. Here's what happened in 2006:

Also a parabolic upswing and fast retreat. Then it drifted up to a new high (chart is messy, the new high was actually a few pennies higher). I say drifted because it was not parabolic. Sentiment never reached the lofty highs previously. At the top it fell into a meandering (complex wave) decline. It's not a perfect match because conditions today are different than 2006 but this pattern is typical for silver. Consider the long term chart:

This pattern was pretty much the same as what we saw in the late 60s and 70s as well. The implications for silver when it does actually reach it's peak (probably late this summer) are not good. Probably right back to where we are right now is my best guess but maybe we see 22 or even 8 again if this is the end of a 5th wave. Don't assume though that just because it's a big wave that it is ending. Silver was trading in single dollars in the late 70s when this started so even the price of $8 in 2004 here represents an 800% gain over the course of a few decades. A logarithmic chart would look less towering but I don't have one for this data set.

What Could Go Wrong?

I could be wrong about that bearish diagonal triangle. It should have a 3/3/3/3/3 pattern. Looks a little funky. One closeup gives me some confidence:

The 1/3/5 legs of a triangle are supposed to be zig zags. This one does look like a zig zag although with the price of silver moving at night it's hard to tell what is going on. The other troubling thing about the triangle is that it is not contracting. That is, it is not wedge shaped.

Here's an alternative wave count possibility:

This is a real possibility, and often the easiest parsings of corrective patterns are incorrect. This is why I'll categorize silver as a "lottery ticket". The arrow marked "crossroads" will give us more information. If that leg crosses below the starting point of our current motive leg then silver is not going up but down. If it stays about that point then things are still up in the air. One must always be on the right side of the market (or at least flat) with Elliott Wave although the best thing about it is that you know when you're wrong!

Let's look at the current minute action to see what might play out:

This I believe is the likely scenario. I've painstakingly made a 5 wave count but really I don't think it's necessary. The eye can quite easily pick out that we're in a minor trend corrective pattern with one more leg up (wave 5) without verifying every little uptick. It is gratifying however to be able to validate.

I predict we'll be seeing swings. Again what I have here is textbook and there's no reason why the correction can't technically extend. The evidence for quite some time has been that every asset class is currently correlated right down to the minor trend. So these swings pretty much mark what I believe the market action will also be (although each asset is swinging different lengths thus making different patterns). As is my usual play, I'll be looking for signals not just in the wave count for silver but also in wave counts and technical indicators for all the asset classes. Why is everything correlated right now? I think the answer is leverage. What we are witnessing is an over-extended market that is dominated by market Beta, and whenever Beta is strong leverage is at work. There will be a point when it will all unwind. But we can trade nimbly in the meantime.

You can see the markings for where each day ends. I believe the morning session will get us to the first sell point. It's a pretty good sell because there is a hard limit on how far it can go. My preference would be to wait for that B wave to make a strong uptick and then enter the trade on a stop and exit on a limit well above the maximum legal limit. Basically, catch the bus for one stop. Then catch it the other direction! This time ride it further (assuming  it's making a motive wave) because this 5 wave could extend who knows how far. I would exit this on indicators preferably although if I couldn't watch the market or trading hours were ending I wouldn't carry the position overnight because the next leg is down.

The final down leg is a very good trade. If we are indeed back on the silver bull then I would expect that wave to stop in the same vicinity as the prior blue wave. That is the EW guideline. It might go to the bottom however because there are still a lot of people ready to short silver back into place. If it does indeed bounce before breaking the motive wave then I'd say there's a good chance that the game is on. I wouldn't miss that uptick.

Here's the potential back story. They say that the three waves of a motive wave represent the buying market. The first wave is enacted by first movers. These are people with a vested interest in accumulating the security. In technical parlance the first wave represents the actions of "support". It might also represent the actions of either savvy traders or lottery ticket players! Regardless, right now there are plenty of people ready to short silver back into place.

What happens if the silver shorts can't get it to break that line? Well, the trend line fails. Indicators fail. All sorts of things fail that were expecting the trend line to continue. Thus begins the 3rd wave. The third wave is composed of technical traders. Once they recognize silver as "alive" then they will begin hoping on board and will drive the price up. It will get to a level and then correct. If the 2nd wave was hard down because of this back story then the 4th wave is most likely to be a sideways correction. This is when the participants in the 5th wave jump in: retail investors. The technical traders will begin to unload as the buying public comes onboard. The sideways correction gives everyone plenty of time to recognize the uptrend.

Now why is silver so particularly potent? It is because of what happened in 1979 with the Hunt Brothers corner. Every two bit trader dreams of a repeat and riding it to the top. Prior to the recent crash the chat boards were loaded with people that were willing to hold silver to 50, 70 or higher. Will those people sit idly by and let another opportunity slide by?

Let's look for more clues. Check out the RSI:

We have a positive reversal signal between points 1 and 2. Granted, the amplitude is very high so it's not a high probability signal but it's a start. Also notice however that during the crash the RSI only dropped to 30 from a high of 90. Prior to the parabolic run-up the RSI dropped significantly below that level so we know that for a few years at least that this current level of RSI is a support level.

Looking at the most recent activity we see that RSI formed a "W" right after the crash. Not unexpected. We are now re-testing that level. Finally the averages are crossing. If we see the short term bounce off of the long term as the point that the RSI crosses then I believe that's a bullish signal. It's happened twice on this chart and both times signaled uptrends. The one time that it crossed ever so slightly it was a turning point.

Finally let's turn to the big wave:

Long term wave counts are always sketchy but I have dug into these waves and verified that they are all motive. The best thing about this pattern for a bullish silver outlook is that the red corrective wave was a 5th wave correction by nature of how deep it dug. The remaining waves can only be organized this way because of the rule that the 3rd wave cannot be the shortest as well as 4th wave violations with other arrangements. As such I believe we have one more wave to complete the big wave and that it should eek out a modest price high over the previous high. RSI positive reversal predicts 56.58. Or, you can add the height of the first wave to the top and you get 55.6. We should be so lucky.