It’s been a volatile past week and a half for the precious metals market, with silver (SLV) getting hit the hardest, falling over 20% from its early August highs.
While we’ve seen an impressive recovery since the lows near $23.50/oz, we have one issue remaining: sentiment. Even though the sharp correction has managed to relieve the previous overbought condition in silver, we have seen absolutely no improvement in bullish sentiment, with sentiment readings sitting at their highest levels since the 2011 peak.
This is not ideal, as it suggests that we saw minimal fear during the pullback, and we continue to remain on a short-term sell signal based on sentiment. Given the lack of improvement in bullish sentiment, I see no reason to be starting new positions in silver above $28.75/oz.
(Source: TC2000.com)
Many bulls are cheering recovery we’ve seen in silver over the past week, convinced that the selling pressured is completely behind us. However, while this relentless rally in silver off of the $23.50/oz lows is certainly impressive, I am not convinced that the metal is immediately heading back to new highs above $31.00/oz.
Unfortunately, while the correction allowed the metals’ moving averages to catch up a little, bullish sentiment hasn’t budged, which is alarming when we’ve seen a more than 20% correction in a week. Generally, we would expect sentiment to shift from extreme optimism to at least neutral after a pullback of this magnitude, but this isn’t what we’ve seen at all.
(Source: Daily Sentiment Index Data, Author’s Chart)
As the chart above shows, the long-term moving average of bullish sentiment for silver is currently sitting at 85%, the 2nd highest reading in the last decade. This suggests that we’ve seen no real fear whatsoever for silver during the recent pullback. In fact, on the day that silver slid more than 10%, we had a reading of 68% bulls or more than two bulls for every one bear.
Based on these elevated sentiment readings, I would argue that this trade remains quite crowded short-term, as the bulls are unwilling to waver even in the face of adverse price action. While this doesn’t mean that we have to head back down to revisit the lows at $23.50/oz, it does mean that the reward to risk here is very poor when it comes to entering new positions above $28.75/oz.
(Source: TC2000.com)
If we take a look at the technical picture, we’ve got short-term resistance for silver at $27.80/oz, and this is a pivotal level for the bulls on a weekly close. While the intra-week rally above $27.80 suggests that the correction could be over, the bulls will need to get above $27.80/oz on the Friday close to increase the probabilities of this.
Unfortunately, whether the correction is over or not, we have strong support at $21.50/oz and are nestled right against resistance at $27.80/oz, which means there’s no great setup here for going long.
Based on the fact that sentiment remains on a short-term sell signal here, I would argue that there is a higher probability of this rally running into selling pressure between $28.50/oz to $29.00/oz, and I would not rule a pullback to $24.50/oz before this correction has run its course.
So, what’s the best course of action?
As noted in previous updates, I took some profits on my silver miners (SIL) in early August to re-balance any overweight positions.
While I remain long core positions in silver miners, I do not believe this is the time to be adding any new exposure. I prefer to start new positions when the majority is either hesitant or terrified, and we don’t have either setup here. Instead, we have the majority as bullish as ever, with the most bulls in silver since the 2011 peak.
While this doesn’t mean that silver is building a long-term top here, it does suggest that the $29.50 – $30.00/oz area could be a short-term top, and it’s less likely that we’ll see a V-shaped recovery to new highs.
Therefore, while I am open to adding new silver miners to my portfolio, I believe patience is the best move. As long as the bears can defend $27.80/oz to $28.00/oz on a weekly close, there’s no reason to think this correction is entirely over just yet.
Disclosure: I am long PAAS, GLGDF
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.
Want More Great Investing Ideas?
3 Possible Directions for the Stock Market from Here
9 “BUY THE DIP” Growth Stocks for 2020