Is Silver Overbought?

Last month was an incredible one for silver (SLV), with the metal tacking on 23%, and massively outperforming gold (GLD), a clear change of character from its performance the past 12 months. This significant improvement in relative strength suggests that the March lows were the bottom for silver, and it also suggests that it might finally be silver’s turn to start outperforming the yellow metal. The good news is that silver is still not a crowded trade from a positioning standpoint, with only 36,000 long contracts as of last week. However, we’re seeing something different in sentiment, with silver sentiment hitting the same levels it tested at the August top last year. While this doesn’t mean we have to see a sharp correction, it does suggest risk is elevated, and therefore, investors would be wise to be patient here. Let’s take a closer look below:

(Source: CFTC.com, Author’s Chart)

As we can see from the chart above, small speculators have finally begun to add back to their long exposure the past couple of weeks, and long contracts held by small speculators jumped nearly 5% to just over 36,000 contracts last week. This suggests that the small speculators are finally beginning to warm up to this trade again, but they remain gun-shy with much less exposure than they had the last time silver was above $18.00/oz. This skittishness isn’t surprising, however, after many small speculators got trapped and beaten to a pulp in the mid-March drop after being positioned at their most bullish levels in two years to start 2020. Therefore, while the rise we’ve seen in long contract exposure was quite large last week, overall exposure remains at pretty subdued levels from a comparative basis to past precedents. Based on this, the positioning indicator remains on a neutral reading currently.

(Source: Daily Sentiment Index Data, Author’s Chart)

Unfortunately, while small speculators seem to be less euphoric about the silver trade here, sentiment is showing us something completely different, with bullish sentiment hitting 93% bulls the past two days. This significant reading shows extreme complacency short-term, and the metal ran into significant trouble in Q3 of last year when we saw similar indicators. The current reading suggests that we have 9.3 bulls for every 10 market participants currently, and this means that silver is getting quite crowded short-term from a sentiment standpoint. While the metal could go higher short-term, this indicator has now flipped to a short-term bearish reading, and it suggests that any 4-5% rallies from here towards $20.00/oz have a good chance of running into some selling pressure. Let’s see if the technical chart is confirming this view:

(Source: TC2000.com)

If we look at the technical picture, the bulls sliced through resistance near $17.00/oz like it wasn’t even there, but we’re now running into a key resistance level at $18.95/oz to $19.00/oz that could be a tricky spot for the bulls. This is especially true given that silver has run up in a straight line by nearly 30% in the past 25 trading days. A pause or pullback here would not be surprising before the next leg higher, but if we do head immediately higher, I would view this as an opportunity to book a little profits above $19.40/oz. This is because not only is sentiment suggesting things are frothy short-term, the technical picture is now starting to get overbought. The good news for silver investors is that the metal has flipped to bullish on its daily and weekly charts, and this suggests that any sharp pullbacks are likely to be buying opportunities. Therefore, for investors looking to add to their silver exposure, it’s probably not the best time to do so at $18.80/oz. However, a 7-10% pullback would provide an opportunity, and I’ll be watching over the next couple weeks to see if some weakness in silver provides an opportunity to add to my silver mining positions. There’s no guarantee that silver pulls back just because sentiment is stretched, but the reward to risk ratio has flipped to neutral here at best at $18.85/oz.

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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The iShares Silver Trust (SLV) was trading at $16.61 per share on Tuesday afternoon, down $0.49 (-2.87%). Year-to-date, SLV has gained 3.88%, versus a 15.22% rise in the benchmark S&P 500 index during the same period.

SLV currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #14 of 34 ETFs in the Precious Metals ETFs category.