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Silver (SLV) since its August 2010 breakout at $18 has made a historic move as investors have exchanged their fiat currencies into silver at a record pace. At that time I predicted a powerful move up to $27. The August breakout signaled that demand in this niche market is far outpacing supply. Whenever these unprecedented long range swings occur professional traders look for a technical reaction as traders tend to take profits and shake out late comers. Prices tend to snap back and support may be found at its 50% retracement level. Silver has hit that mark at $32.50 and also touched its 9 month trendline yesterday. Many indicators augur that a reversal has formed below $35.

This precipitous decline in silver has reminded us of the importance of managing volatility. One may well understand the fundamentals but can fall a snare if the element of time is neglected.

Taking timely profits upon reaching overbought readings and overhead resistance are vital. One must also be careful about selling when support is being reached and abruptly exiting during a selling capitulation. Sometimes the price tends to overshoot support levels to cause additional selling. Technically this is referred to as an exhaustion move. However, after these extreme waterfall declines one must always be alert to the possibility of a powerful reversal upward.

In late April of 2011, I had alerted my readers about a needed and healthy overdue correction, which has now occurred in the silver market. In addition, I signaled the possibility of a dead cat bounce in the U.S. dollar. Selling has come and gone across the commodity and mining sector like a tornado. This may have been an excessive reaction to such storms.

The specter of default and loss of its AAA credit rating are beginning to form storm clouds on the horizon. I believe this May 2011, U.S. dollar dead cat bounce in concert with the precious metals decline has been constructive and a blessing for long term gold and silver holders to reenter. When too many passengers tilt to one side of the ship, stability is threatened. As speculators piled aboard, this trade became crowded. This violent downturn has served as a cathartic to eliminate many abuses to the system.

Astute buyers are able to pick up gold and silver at a discount. These fire-sales do not occur very often. When they do…carpe diem!

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