Silver Setting up For a 22% Plunge?

It has been a wild year in the commodities market, most notably in the silver market. Over the past 52-weeks, silver futures (/SI) rose from a low of $17.325 on July 28th to a high of $49.82 on April 25th – a 187.5% gain. Most of that gain took place over a two month span from February 24th to April 25th (price jumped from $31.70 to $49.82). There were many theories bouncing around the investing community as to why silver was taking off; inflationary concerns, possible destruction of the U.S. dollar, an entity was trying to corner the market, or a good old fashioned short squeeze. While all of those are distinct possibilities and may have all contributed to the ascension, a short squeeze appears to be the most plausible. If you take a look at a one year chart of silver futures (/SI), you will notice that the move up was a steady collection of mostly small percentage moves. It was not until the futures price broke $40 that large price fluctuations began to occur. Buyers were getting greedy, and shorts were getting nervous. Once bulls broke over the $40 level, it only took twelve days to reach the 52-week high. The move culminated, and ultimately ended, in a one-day 9.1% rise from $45.645 to that high of $49.82 (April 25th). That jump was met with heavy selling pressure, however, and silver futures ended up closing in negative territory on the day at $46.97. It was the beginning of the end. Equally as impressive as that meteoric, nine month, 187.5% rise, was the subsequent, fourteen day, 35% plunge from $49.82 to $32.30. That dramatic drop highlights the fact that there was no real price support anywhere near $40, and the move up was likely nothing more than the result of massive short covering. Of course, a hike in silver margin rates, along with a strengthening dollar helped contribute to silver's descent, but were only contributing factors to a move that would have inevitably happened anyway. “Look back to where you have been, for a clue to where you are going.” Silver futures have been consolidating in the mid-$30's since the middle of May, but bulls appear to be weakening, as the contract price has been consistently making lower highs and lower lows over the past four weeks. Silver futures are currently trading at $33.78, near the critical $33 support area. That level has held firm on four occasions since May 6th. As the magnified one year daily chart below shows, should the $33 level be broken, no significant support comes into play until $26.30 – 22% lower than the current trading price. A bearish head-and-shoulders pattern is taking shape, with $26.30 serving as the perfect target area. If you prefer ETF's, take a look at a one year daily chart of iShares Silver Trust SLV. $32.20 is currently serving as the critical support level to watch. Beyond that, no support comes into play until $26.11 – 18% lower than the current trading price. If the action in the silver market over the past year has taught investors anything, it is that the silver market moves fast and it moves big – especially to the downside. Traders that bought in the mid to high $20's are sitting on edge right now, and if the futures price breaks below $33, the market could see another dramatic selloff, as bulls stampede for the exit. Time will tell. Disclaimer Neither Benzinga nor its staff recommends that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.