It’s been nearly two weeks since the 15% daily rout in the silver market (SLV), with the decline sending most silver miners (SIL) down 25% or more from their August highs.
While this sharp correction has helped to relieve overbought conditions in both the miners and silver, it hasn’t done anything to fix sentiment, which remains at the highest levels in nearly a decade.
This suggests that there could be more consolidation ahead for the metal before it tries to make another run at the $30.00/oz area and that there’s no need to aggressively position in miners here with silver at $27.00/oz. Let’s take a closer look below:
(Source: Daily Sentiment Index, Author’s Chart)
As the chart above shows, the long-term moving average that measures bullish sentiment in silver (white line) remains at lofty levels and has barely budged despite a 20% correction in the metal. This is generally not a good sign.
The more reliable bottoms show up when market participants throw in the towel and puke up their positions, not when they are frustrated to have gone through a drawdown but remain predominantly bullish. Based on the current reading of 84% in silver, I would argue that there’s limited fear in the trade, and the crowded trade has not yet been unwound.
While this doesn’t mean that we need to see lower prices below the $23.50/oz low to fix this reading, it does suggest that we’ll need to correct through time or price. Therefore, while some investors might be hoping for a new high in silver within the next couple of weeks, I think it’s unlikely.
(Source: TC2000.com)
If we look at the weekly chart above, we remain nestled against resistance at $27.80/oz, with no strong support until the $21.50/oz level. Therefore, while we have seen a sharp correction from the highs, the reward to risk isn’t great at current levels with support much lower.
If the bulls could manage to get through the $27.80/oz on a weekly close, I would be more open-minded that this could be a short-term consolidation and that we could see new highs by as early as October.
However, as long as we are $27.80/oz on a weekly closing basis, a re-test of $23.50/oz low is entirely possible.
(Source: TC2000.com)
Zooming in further to a daily chart, we can see that silver remains quite extended above its 200-day moving average (yellow line), and it’s rare to see sustained upside when the metal is more than 50% above its moving.
Therefore, this corroborates the view that we’re unlikely to see new highs in the next couple of weeks in silver. The good news for the bulls is that trading sideways in a range between $23.50/oz – $30.00/oz would be a bullish development, as we often see a multi-week base built following a major breakout.
Given the 5-year breakout for silver above the $21.50/oz level, I would view any corrections that remain above this breakout area to be noise. However, while we’re in the upper end of this range near $27.00/oz, the reward to risk remains balanced at best.
So, what’s the best course of action here?
Given that sentiment remains elevated for silver and we continue to remain extended technically, I believe the best move is patience to wait for new setups to develop.
If this truly is a successful breakout for silver, we should see the $23.50/oz level defended on a weekly closing basis, and pullbacks below $24.00/oz should be low-risk buying opportunities.
Therefore, I am in no rush to add new exposure, but if the metal pulls back and sentiment also cools off, this would tell us we’re getting closer to preparing for what’s likely to be another leg higher in Q4.
In summary, I see this as a buy the dip market, but the low-risk trade is beginning to add exposure below $24.00/oz, not near $27.00/oz, while the bulls remain convinced that new highs are imminent.
Disclosure: I am long PAAS, SILV, GLGDF
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The iShares Silver Trust (SLV) was trading at $24.69 per share on Tuesday morning, up $0.09 (+0.37%). Year-to-date, SLV has gained 48.02%, versus a 7.61% rise in the benchmark S&P 500 index during the same period.
SLV currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #3 of 34 ETFs in the Precious Metals ETFs category.
About the Author: Taylor Dart
Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More…