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The End Of The Bull Run For Silver?

05/20/11 12:22:06 PM
by Donald W. Pendergast, Jr.

Who would have believed in early 2003 that the price of silver -- at $5 an ounce -- was destined to rise to nearly $50 an ounce in only eight years? Is this latest plunge merely a blip, or is it warning of a structural change in the status of the epic bull run in this key commodity?

Security:   SLV
Position:   N/A

As impressive as a 900+% rise in eight years is, we also need to remember that silver (SLV) was selling for only $8.45 in late October 2008 -- a mere 31 months ago -- and that translates into an even more impressive rate of gain of nearly 480%. I doubt there is very much a silver shortage (they've been trotting out that same old claim since the 1970s), given all of the new mining activity in the precious metals sector over the last decade, and therefore it is entirely healthy, if not essential, that a market as overbought and overhyped as the silver market is to experience a major correction. See Figure 1.

FIGURE 1: SLV, DAILY. If only trading really were as simple as A-B-C. Typically, shock trend reversals like this take some time to play out; one such possible scenario for the weeks and months ahead is traced out on this daily chart.
Graphic provided by: MetaStock.
Graphic provided by: WB Detrend RT EOD from ProfitTrader for MetaStock.
While it is foolish and sometimes financially harmful to make market predictions, on occasion it does make sense to at least allow for various market scenarios to play out, giving oneself time to prepare in advance for any contingency. Typically, when you see a massive, initial selloff that reverses a major bull run, there will be a new influx of buyers (and a lot of short-covering) as the first wave of selling dries up and a wave B retracement rally attempts to recover some of the initial losses. Eventually, wave B runs out of steam and a powerful, secondary wave of selling gets under way, potentially dragging prices down below wave A's low. That's how a valid C wave plays out, but we're getting way ahead of ourselves.

Right now, we want to see some evidence that wave A has finally bottomed, with prices turning higher far enough to anticipate a valid wave B thrust up to a major area of resistance. Don't even think of trying to time an entry into a wave B upthrust, as the thing could end quickly with you left holding the bag if the market begins to head south again more quickly than you can imagine. No, the best way is, again, to patiently wait for waves A and B to materialize before considering a short attempt into a bearish wave C. This could be a good pattern to wait for, by the way, especially if the bull market is completely finished. If the bull is truly dead, we might see silver drop into the $20s within a few weeks and even into the teens, given a few more months.

Given the volatility and unpredictability of the silver market, it pays to err on the side of caution. If you are still long silver, consider a wave B retracement rally to be a gift from heaven and use such a blessing to sell out your position before your account gets whacked on a nasty wave C decline.

And by all means, heed the old trader's bit of wisdom: "If in doubt, stay out."

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address:

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