Silver broke its September lows this week, but thus far has found supportive action.
Bullish sentiment continues to hover above the 50% level, with much bulls in silver than we have in gold.
The drop below $16.90/oz on silver offered a minor buying opportunity, but the signals were nowhere near as strong as those given on gold.
It’s been a grueling month thus far for metals investors, with more losses stacking up, and the metals erasing all of October’s recovery. As discussed previously, there was a decent chance that silver (SLV) would re-test or break September’s lows near $16.90/oz, as bullish sentiment remained elevated despite the decline. While I was hoping for some capitulation in sentiment on the drop below $16.90/oz this week, we didn’t see any real fear. Bullish sentiment fell to 51%, but still a reading where the bulls are outweighing the bears marginally. Based on this, the potential for another low remains before the correction is over.
We finally got what we wanted in silver this week, which was a violent drop below the $16.90/oz low on the metal from September 30th. These undercuts are often enough to shake out weak hands and generally make some of the bulls rethink their long positions. Unfortunately, this drop in silver did not elicit any fear from the bull camp, with a higher reading in bullish sentiment despite a lower low in price. The September 30th drop saw bullish sentiment on silver fall to 49%, while the recent low saw it touch 51%. This suggests that speculators are getting more bullish despite lower prices, and this has weakened the thesis for starting a position.
(Source: Daily Sentiment Index Data, Author’s Chart)
As we can see in the above chart, sentiment continues to remain below its key moving average, and this generally complicates things from the long side. In April through August, when silver was above this moving average, making money was much easier. When sentiment is below this moving average, sharp rallies often run into immediate selling pressure. This is what we’ve seen over the past month or so in silver, with any recoveries immediately thwarted by the bears. Until silver can get back above this moving average and show commitment, I see no reason to be aggressive from the long side.
Fortunately for the bulls, the good news is that the bigger picture remains bullish, despite the complicated short-term picture. The Silver ETF remains above its 20-month moving average (red line), and this moving average is beginning to curl up as of this month. Once this moving average is reclaimed, it typically acts as support on any pullbacks. This area coincides with the $15.00 level on SLV and would be a low-risk area to establish a position. However, at current levels with the bounce we’ve seen since Monday, I still don’t see a low-risk entry for silver. This doesn’t mean the metal can’t rally or that there’s no chance it has bottomed, it just means that the trade setup is much more muddled than the gold setup. Gold (GLD) also dropped below its prior low this week but triggered short-term buy signals, and I have started a new position there at $1,451/oz.
Zooming in to a daily chart for silver, we’ve got a wide range with support below at $15.30 for SLV, with the rising 20-month moving average also converging near this area. This is the ideal buy spot for the metal, where investors can be confident they have a high-probability setup. However, where we sit a little shy of $16.00 currently on SLV, there is no real A+ setup, in my opinion.
Any rallies that cannot get through $17.50 on SLV are likely just noise, and just oversold bounces within an intermediate downtrend. For this reason, I would be inclined to take profits on SLV at $17.00 or higher if I had bought the dip. While I am more confident that we are near a bottom in gold, silver is the weaker metal but has a much higher bull following. For this reason, I see the silver trade as inferior to gold at this time and will remain of this opinion unless we can break $16.40/oz on silver, or $15.30 on SLV. Silver continues to build a bowl-shaped base, and declines outside of this bowl would be the best buying opportunity as this would likely flush out the final weak hands for a reliable bottom.
The iShares Silver Trust (SLV) was trading at $15.92 per share on Thursday morning, up $0.09 (+0.57%). Year-to-date, SLV has declined -0.44%, versus a 16.01% rise in the benchmark S&P 500 index during the same period.
About the Author: Taylor Dart
Taylor Dart has over 10 years of experience in active & passive investing specializing in mid-cap growth stocks, as well as the precious metals sector. He has been writing on Seeking Alpha for four years, and managing his own portfolios since 2008. His main focus is on growth stocks outperforming the market and their peers. In addition to looking at the fundamentals, he uses different timing models for industry groups, and scans upwards of 2000 stocks daily to identify the best fundamental opportunities with the timeliest technical setups. Taylor is a huge proponent of Trend Following and the “Turtles” who enjoyed compound annual growth rates of over 50 percent per year.