We’ve seen a rough start to the week for the price of silver (SLV), with the metal down more than 2% to start the week, sliding below critical support at $24.75/oz. While there’s still lots of time left in the week for the metal to recover, a weekly close below $24.75/oz would be a negative development, increasing the probability of a re-test of the $22.00/oz support, which was most recently tested in December. The good news is that sentiment continues to trade in a zone where we have seen bottoms previously, and the metal remains short-term oversold, down for its fourth consecutive week in a row. However, an inability to rally from oversold levels can often be a negative sign, so the bulls will need to step up and start playing defense here immediately.
(Source: Daily Sentiment Index Data, Author’s Chart)
Since the second week of July, we’ve had all of the conditions in place for a short-term bottom in the price of silver, including depressed sentiment, as shown above. Typically, when bullish sentiment for silver has declined below 30%, we have seen violent rallies in the price of silver, with the metal returning 15% or more over the following three months. However, the most recent decline in bullish sentiment has been met with more selling, with silver unable to hold onto its 200-day moving average and continuing to make new lows below its recent oversold signal.
Ideally, I would have liked to have seen bullish sentiment for silver decline to new lows with the metal, but this is not what we’ve seen. Instead, silver investors seem to be holding their ground, with sentiment at higher levels despite silver trading to lower lows relative to the initial low on June 29th. While this indicator remains on a contrarian bullish reading, we have not dipped to a strong buy signal, which would require a dip below 15% bulls.
(Source: TC2000.com)
If we look at the technical picture for silver, we can see that silver continues to trade within its low-risk buy zone (green box), and sharp drawdowns often occur after oversold buy signals. However, the current drawdown from the buy signal is beginning to get long in the tooth, and silver has now slid below its key $24.75/oz level as well as of Tuesday’s trading.
This is not an issue yet, but a persistent inability to rally from an oversold level would be a red flag. For now, this decline could simply be a violent shakeout, but for this pullback to remain normal, we do not want to see silver break below $24.00/oz. A break below this level would increase the probability of a re-test of the $22.00/oz level. One can certainly argue that the fundamentals for silver are the strongest they’ve been in years, given silver’s critical role in a clean energy future. However, while these fundamentals suggest a bright future for the metal, they don’t rule out sharp short-term corrections like we’re seeing currently.
So, what’s the good news?
(Source: TC2000.com)
As shown above, silver continues to trade in a base-on-base setup, and the metal also remains above its monthly moving averages. This suggests that the bullish picture remains completely intact despite this 20% correction and that there’s no reason to lose any sleep. As long as silver can stay above $22.00/oz on a monthly closing basis, the longer-term charts will remain bullish, and 20% - 25% pullbacks should present buying opportunities. The only issue short-term, as noted, is that if $24.00/oz can’t hold, a test of $22.00/oz comes back on the table.
With the Federal Reserve Meeting on deck this week, it’s no surprise that we’re seeing volatility in the precious metals, but the good news is that we’re in a timing window for a bottom from a sentiment, seasonality, and technical standpoint. The key, however, is that silver holds onto the $24.00/oz level and that the bulls defend $24.75/oz on a weekly close. If these two things are accomplished, it’s possible we’re seeing the bottom here, setting up a run back resistance at $29.00/oz before year-end.
Given the timing window, we’re in, I continue to this as a low-risk area to start a position in SLV, with a stop on the trade below $22.00/oz. This provides a solid reward/risk setup, with $2.50 in risk to the bottom of the current base and upside of $5.50/oz if silver re-tests its 52-week highs. Assuming a successful breakout, there is no resistance on silver until the $34.00/oz level, offering nearly $10.00/oz in upside from current levels. For now, I remain long silver (SLV), as well as GoGold Resources (GLGDF), my favorite junior silver producer.
Disclosure: I am long SLV, 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.
SLV shares were trading at $22.83 per share on Tuesday morning, down $0.53 (-2.27%). Year-to-date, SLV has declined -7.08%, versus a 17.90% rise in the benchmark S&P 500 index during the same period.
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.
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