It's Finally Over. Now What?

I'm about to tell you "now, what" but first some background.

Yes, this forced "correction" is now over. There will still be dips and bumps but I'm extremely confident in the area around 33 and that there is no way the people predicting $28 silver are going to be correct. That said, silver is not going straight back up nor is it going back to $49 anytime soon so be patient. Gold has found its bottom as well and will not be seeing 1460 again for a while. Here are your updated hourly charts showing our current position. Taken in context with copper at 410, crude back near $100, the absolutely screaming grains and the shrugging off of the FOMC minutes, we can conclude that Turd's Bottom #2 is in and it's time to make some money on the long side again.

OK, now bear with me. I've got to somehow bring all of this together for you in the written format. It would be much easier in person or on the phone, as I explained it to Mr. Hyde earlier.

First of all, you need to go back and reacquaint yourself with this part of the note I gave you back on Sunday. Read this very carefully and thoroughly as it is tremendously important that you understand it:

(Begin)
"Finally, this morning, I want to spend some significant time discussing silver and where it may head from here. First of all, for the short term, here's another look at the two-hour chart. We'll know very soon whether a bottom has formed or whether silver is headed to new lows for this correction.

Here's the thing, recent history would strongly suggest that silver will not head lower and that support around 33-34 will hold. Why do I say this? Well, I think you all know by now that much of my prognosticative ability is due to pattern recognition and, for the immediate future in silver, here is the pattern of which you need to be aware.

Keep in mind that the Comex continues to run extremely low on physical silver. Of this, there is no doubt. The latest data showed only 32MM ounces on hand. That's only enough silver to physically settle about 6000 contracts.
The last three "delivery" months for Comex silver were Dec10, Mar11 and May11. On the chart above, note the consistent pattern in the weeks leading up to "first notice day" of those contracts. (Again, first notice day is put-up-or-shut-up day. It's the day by which you must supply 100% margin in your account to signal your intention to actually take delivery on your contract.) Corrections came and lows were made in the early to middle weeks of the months preceding first notice day. Specifically, a corrective low was made on10/22/10 before a rally toward the first notice day of the Dec10 contract, 11/29/10. Next, silver bottomed on 1/25/11 before rallying toward the first notice day of the Mar11, 2/28/11. Finally, silver rallied from3/17/11 clear through first notice day for the May11 on 4/29/11.
This cycle has indicated to me for weeks that silver would peak sometime between 4/29 and 5/6 and then "correct" between 5/9 and 5/23. Also, if you look closely at the chart, notice that the pattern had been for silver to rally for about a week past first notice day. This is why I kept looking for one more run toward 50 and even 52 back during the first week of May. As you know, that didn't happen. Instead, the correction began in earnest on Monday, the 2nd, and has continued to this moment. Because the rally from 3/17 was steeper than the previous two (42% vs 26%), it follows that the "correction" has been more steep, too.

Now, here's where it begins to get even more interesting. To me, the "proper" percentage gain for a rally into first notice day is 26.23%. This is coincidentally(?) the exact gain made from 10/22/10 to the margin hike highs of 11/9/10 and the gain from 1/25/11 to 2/28/11. If we can now all agree that the price action of late April was a blow off top, where The Cartel stood aside and let silver roll all the way to $50, then we can assume that silver should have rallied only to about $43.25. Had it stopped there like it should have, we'd be left with a chart that looked like this:

Ultimately, this post is concerned with what we can expect for the next six weeks as we head toward first notice day for the July11 contract, so here's what I anticipate:
1) Silver continues to base this week between $33 and $35.
2) By Friday but no later than next Wednesday, silver will be chugging higher.
3) Applying a 26.23% gain to a low of $33 or $34 gives us a price target of $42-43 by 6/30/11, the first notice day of the July11 contract.

For those keeping score at home, two weeks ago I was expecting silver to only correct to about 45, not 35. I then expected a 40+% rally toward $65, not a 26% rally to $43. The severity of this correction has forced me to alter these forecasts but the pattern remains.

Therefore, I will look to be a buyer this week if/when silver retreats again to the area between 33 and 34. I will probably be buying July $40 calls. (I did.) I may even sell some 43s or 45s against them to create a spread. (I haven't yet.)
I'll let you know.
The main thing and the point of this exercise is to illustrate for you that the savage beating silver has taken over the past two weeks was brutal but not unexpected. Pattern and timing now strongly suggest that silver will once again swing higher very soon. Be patient but have faith. Opportunity again awaits just over the horizon."
(End)

But all of this shouldn't be news to anyone who has been reading this blog for the past month. I've been discussing this "pattern" since mid-April. The swings have been more wild than anticipated but nothing that has happened has been outside of the pattern.

Here's what I want you to think about. If you're like me, you've often wondered how the metals would trade without the daily interference and capping of The Cartel. I believe now, in hindsight, that we finally saw this transpire in the period of April 15-25. In those seven trading days, silver went up almost 20%, rallying from the area around 42 to nearly 50. The unprecedented plan was already in place to ruthlessly raise margins 5 times in 9 days so The Cartel and their monkeys "stood down" and allowed the chart to be painted with a blowoff, parabolic top that coincidentally peaked right at the old, all-time highs. The brutal, margin-inspired smashdown that followed has trimmed open interest by a third and has resulted in many speculators leaving the silver markets, most of them for good.

Under this working assumption and with the creative use of some white-out, we're left with a daily chart of the July silver that looks like this:

And here is where the entire pattern now comes together and we can wrap things up in a neat little package.

1) Silver should have made it no farther than 42 or 43 back in April. It was allowed to trade to near 50.

2) The anticipated correction between 5/6 and 5/20 should have only been 10-12% but since the top was overbought all the way to resistance at 50, the bottom has been oversold all the way to support at 33.

3) Following pattern, silver has bottomed this week and will now trade to 36.50, then on to 39.50 and finally back up to a "double top" near 42 or 43 sometime before the July silver "first notice day" of June 30.

4) Gold, having also been "let go" to overextend to 1577 has now corrected and consolidated above 1480. It will also rally well into June before finally peaking somewhere between 1560 and 1580. (Sorry, no 1600 by 6/10/10 but considering we've already come within $23, I'd say that's close enough.)

5) Having accomplished all of this by the end of June, the metals will enter their typical summer doldrums. Silver will have painted a double top on our "white out" chart. Gold will have a near perfect double top on its actual chart. The PMs will selloff through July and into August, just like they did in July and August of 2010 and then January and into February of this year. Gold will likely retrace all the way to $1450 or so. Silver will trade back down to this 33-35 area.

6) By this point in late summer, all will seem lost. Every two-bit technician and topcaller will be proclaiming the end of "The Great PM Rally", just like they did back in late January. But it won't be the end, it will be the start of a new beginning.

7) The metals will rally from late summer into December. Gold will trade to a peak near $1750. Silver will again trade near $50, this time for real.

So there you have it. That's how it's going to work. Call me crazy but do you really have reason to doubt me? My advice to you is to bookmark this page or maybe even print it for posterity. Forward it to your friends. You'll want to review it from time to time, particularly during the dog days of August when it will take a lot of courage and fortitude to step to the plate and go long.

Finally, I had a 90-minute conference call with my web developers yesterday. The new site is coming along beautifully and I am extremely excited to share it with you. It should be "live" sometime in early June and it will be a handy tool for us to cope with the summer doldrums and prepare for the autumn charge. As mentioned before, it will be free for all to use but only registered "members" will be allowed to comment on the blog notes or the forums. Registering will not be difficult, however, as you will be able to sign in through Facebook, Google and many other social media.

That's it for today. I will not be posting again until tomorrow morning as I want to leave this post up and "above the fold", for all to read and ponder, for as long as possible. Thank you for all your input and for making this blog the absolute best PM-focused site on the internet.

TF