JERRY'S SILVER UPDATE

Many of you have been following Chaz's recommendations for a period of time now. He knows the silver business. I, on the other hand, don't know much about anything....but I do know how to read charts. This doesn't mean that I'm always right. Many of you have emailed me over the weekend seeking an update from Chaz on the silver situation since silver has been in a free fall lately. Chaz did send me an update which I just posted. There are a couple of points that I want to make. First, there is a difference between fundamental analysis or indicators and technical analysis or indicators (charts). Many times these indicators are compatible, but there are times when they differ. Chaz is an expert when it comes to the fundamental analysis of the silver market. He has been in the business for over 30 years. I trust his opinion. The fundamental situation in silver...and gold...shows that demand should increase as the uncertainty of world and national events take hold of the market over the next year...or two. History shows that when there is extreme uncertainty in the market, the first move is usually into U.S. Treasuries. As the investors sit in this safe but lowly profitable instrument, the pressure starts to build. The pressure of deciding how long to stay there. No financial firm's clients want to hear that they didn't make any return on their money for the year because they were in Treasuries...especially after they are charged a 3% management fee. There is pressure on these firms to find another "safe" investment with a better return. This is when those firms turn to gold and, more recently, silver. You can look at the recent rise in Treasuries by looking at the TLT. You can see how Treasuries have started a nearly parabolic move. This has coincided with the dramatic drop in silver and gold...and the overall market. We should start to see these trends reverse. The question on everyone's mind is when?

It is often said that the fundamentals tell you what to buy and the technicals tell you when to buy them. In other words, the charts can help you with the timing. One of the things that has bothered me over the last few months, on the gold and silver charts, is that we appeared to have a wave A down (the May move in silver and the August move in gold) which was followed by a wave B up. It felt like we needed to get one more move down (wave C) before we could get the next big rally that we were all expecting. This was one of the reasons why I recommended puts on the GLD a few weeks ago. The silver chart was harder to read since the "B" wave back up was somewhat erratic. I could see a scenario back in July where silver could have completed it's ABC pattern and was possibly on the next move higher. I entered a trade on the SLV in case the rally was underway. Some of these early bullish trades worked out okay, but I was also stopped out of a few. We (Chaz and I) were expecting the possibility that silver could drop before making that next move up. On September 19th, the SLV made it's first solid close below its 50 day MA. The trend was still up, but the chart was saying that the sellers were gaining control. This doesn't mean that a downtrend will follow, but it usually tells me not to add any new bullish positions....and to make sure I have stops in place for my current positions (if it was in your plan to use a stop. In a call option trade, you might have been willing to risk the entire amount in the trade). As the selling increased, it became apparent that we could be in the "C" wave of a larger bullish ABC pattern. If you look at the longer term chart (weekly chart) of the SLV and GLD, you can see this possible bullish ABC pattern more clearly. The next question would be, "How much further can we fall?". One thing I pointed out in an earlier posting was that there were too many people out there saying to buy gold on this drop. When I see a lot of people recommending to buy something after a big drop, it usually means that it isn't done dropping. Stocks, in particular, tend to bottom out when no one wants to buy them. I think that gold and silver will continue to drop (in the short term) until people are afraid to buy them. Based on a Fibonacci projection measurement of that possible bullish ABC pattern, the SLV could still drop to around the $22 to $26 range. My theory is that the market will continue to drop to the 1040 area on the S&P 500 and that silver (and gold) could also continue to drop (although gold and silver could stop dropping before the market stops dropping). At that point, I could see the market start to rally. If the market starts to rally, I can easily see money managers out there getting out of Treasuries and moving into gold and silver. This is where I could see the big rally taking place in silver and gold. It would also likely move just as fast to the upside and it did to the downside. That would keep Chaz's end of the year target on track.

This finally leads me to my second point. No one knows the absolute future movement of a stock (or commodity). We can give a probabilistic outlook (which will often be right), but we can't give an absolute outlook. You can never keep betting your entire account on one probabilistic outcome. It may work many times in a row, but eventually it isn't going to work. It's like betting it all on black at the roulette table. You could be right 10 times in a row, but eventually it is going to land on red. When that happens, you could end up losing everything. Money management is the most important part of trading. Trade management is second. If you used good money and trade management techniques with Chaz's latest recommendations, you would still have a large portion of your trading account ready to capitalize on a future rally. You might still have a draw down, but it would likely be in a more acceptable range (15% to 25%). If you didn't use good money and trade management, you could be stuck with a 60% to 80% draw down in your account....hoping for a rally to bail you out. I think that a rally will likely come to bail you out, but what if it doesn't? If you survive this drop, I hope you take your money and trade management more seriously....because you might not get bailed out the next time. That's assuming that you get bailed out this time. Chaz is no more a market psychic than I am....but he is good. I'll let you know what the charts are telling me as I watch this trade over the next few months. We will also continue to welcome any updates from Chaz on any fundamental changes to the silver trade.