How does this square with our bullish stance toward silver in the recent past? - well, it doesn't. We have been strongly positive on silver in the recent past for 2 big reasons. One is the proximity of a very strong support level that has reversed the price to the upside twice since last September, and the other is the highly favorable COT picture. However, pattern development has been unfavorable in recent weeks, with key support at the key $26 - $27 continuing to be eroded and the COTs have started to deteriorate noticably. These developments put us on notice that a nasty surprise may be just around the corner.
On silver's 6-month chart we can see that it has failed to gain traction and establish itself above its 50-day moving average and thus get away from the danger zone, and now this average and the 200-day, which are bearishly aligned, are descending on the price from above and pressuring it increasingly to crash the key support - the pattern that has formed since the mid-May low now looks like a potential bear Flag, and if this is what it is then a sudden severe downleg is likely to occur soon that will crash the key support, and given the huge importance of this support, such a development can be expected to lead to a vertical plunge. How far will silver drop if this support fails? - let's now look at the 3-year chart to see.
The 3-year chart for silver shows that since the April - May 2011 blowoff top, it has been in a quite orderly major downtrend, and we can readily see that the downside target on failure of the nearby key support is defined by the lower boundary of this downtrend at about $20 - $21, which fits nicely with the next zone of major support arising from the extensive trading just below $20 in 2009 and 2010 coming into play as $20 is approached. From all this we can reasonably conclude that the downside target for silver on failure of the nearby support is about $20 - $21, although a vertical plunge may briefly take it below this level - if it does jump in with both feet, for this should be the final bottom, as QE is not off the table at all, just delayed.
The recent silver COT has been hugely bullish, although it didn't end up producing much of a rally. However, over the past couple of weeks it has gotten less so as the Commercials have started to build up short positions again - and it is suspected that early this week, after the unfavorable (for markets) Greek vote, they may well be piling them on ahead of the FOMC meeting this Wednesday. This does not augur well at all for the short-term. Nevertheless it is important to keep in mind that overall this silver COT is still strongly bullish, so the scenario that now looks likely is a near-term failure of support and plunge into what should prove to be a final bottom in the $20 - $21 area ahead of the major uptrend that will be activated by the mega QE that must occur to save Europe from collapsing into total chaos.
