Silver: Time for Patience

It’s been a volatile couple of weeks for investors in silver (SLV) following the metal’s 13% decline in mid-August, which put a dent in its upside momentum. The significant reversal at the $30.00/oz level has pushed the momentum in favor of the bears for the time being, and often corrections after parabolic rallies like this take at least eight to sixteen weeks to complete.

This is because it takes a while for speculators to lose interest in an asset class and sell out of disgust after they’ve just witnessed a powerful advance.

The good news is that while this correction might be frustrating for the bulls, especially those looking for $50.00/oz by year-end, the long-term picture will remain bullish as long as the $23.50/oz level is defended on a weekly close. Let’s take a closer look at the weight of evidence below:

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

If we begin with bullish sentiment for silver, it’s been a wild year, as we saw sentiment drop to just 4% bulls in early March before sentiment rose to a new multi-year high at 97% bulls three weeks ago. These massive shifts in sentiment in a short period (lows to highs) often mark tops for a commodity, hence why there was elevated risk in the metal a few weeks ago when speculators were elbowing each other to get into the trade.

While short-term sentiment has cooled off a little with the violent drop on August 11th, the long-term moving average for bullish sentiment remains in the cautious zone at 82% bulls. This suggests that while bounces are possible and we are making progress on unwinding this crowded trade, it will likely be very difficult for silver to make new highs before October.

(Source: TC2000.com)

As I noted a few weeks ago, silver was printing several caution signals in a row (orange bars) with the metal more than 30% above its acceleration bands heading into mid-August. While this rally continued a little longer than I expected with five consecutive caution signals, the gains from these types of advances are typically ephemeral, and this is precisely what we saw.

Not only was this whole advance retraced entirely, but it only took one day for this to occur. Fortunately, we are no longer on caution bars despite trading at similar levels as the overbought readings have subsided. However, we still remain extended on a short-term basis, more than 25% above the metal’s long-term moving average.

(Source: TC2000.com)

Finally, if we look at key support and resistance levels above, we can see strong support at $21.50/oz near the multi-year breakout area and strong resistance at $27.80/oz.

While the metal has made a few attempts to get above this resistance level at $27.80/oz, a clean weekly close above this level will be required to remove this resistance and increase the probability that the correction is over. Therefore, while we’ve seen the worst of the correction with the dip to $23.50/oz from a price standpoint, the correction has not satisfied the time element, so I see no reason to rush into the miners or silver near $28.00/oz.

So, what’s the best course of action?

Given that silver has registered a massive monthly breakout above $21.50/oz, the bulls will remain in complete control of the bigger picture as long as they defend $23.50/oz. However, I prefer to buy and silver when we see excessive fear in the market, or at a bare minimum, indecision.

After a 120% rally in 100 days off of the March lows, it’s going to take some more choppy price action to put make the bulls begin to doubt this rally.

Currently, I am keeping a close eye on Pan American Silver (PAAS) and Silvercrest Metals (SILV) to add to my position, and I would get very interested in adding to silver if it came down near $24.00/oz to create a double bottom. At this juncture, I see no reason to aggressively add to metals or miners as there is minimal evidence that this correction is complete just yet.  Therefore, patience is required here, in my opinion, as the lowest-risk entry points have still not arrived yet.

Disclosure: I am long PAAS, SILV

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 $25.00 per share on Thursday afternoon, down $0.55 (-2.15%). Year-to-date, SLV has gained 49.88%, versus a 8.84% 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.