It’s been a wild week in the markets, and the silver lining for the precious metals sector is that the sell-off finally pushed some off the offside and wildly bullish small speculators out of their positions. In addition, the 13% drop in the silver (SLV) price scared off some of the bulls, and we got the dip we were looking for in bullish sentiment. Bullish sentiment finished last week at 44% bulls, the lowest reading in over nine months, and finally dropped beneath the October sentiment lows at 50%. Based on this drop in bullish sentiment and a slight drop in speculative positioning, we have finally seen a step in the right direction for a bullish setup. This does not mean that it’s time to buy with both hands, but we’ve seen a massive improvement from where we sat two weeks ago.
(Source: Daily Sentiment Index Data, Author’s Chart)
As we can see in the chart above, bullish sentiment finally took a nice hit last week, dropping nearly 50 points from 88% bulls to 44% bulls. The great news about this drop was that we finally took out the October lows near 50% by over 500 basis points (44% vs. 49%), despite only a slight drop beneath the October lows from a price standpoint. This suggests that the bulls are getting more scared than they were in October despite roughly the same price on silver. While a reading of 40% bullish sentiment is hardly a level where I would consider we have outright panic, it is a massive improvement from where we sat a week ago, and a big step in the right direction. Ideally, however, I would like to see bullish sentiment drop below 40% bulls to set up a strong buy signal.
(Source: Author’s Chart, CTFC.com)
If we move over to positioning by small speculators in silver, we continue to see a significant net long position, a massive 180 from where we sat just nine months ago in May. However, we finally saw a little bit of paring back last week, with the small speculators shedding 4,000 contracts, and finishing the week at close to 73,000 contracts. It is worth noting that this reading is still in the danger zone in terms of positioning, but this reading is as of Wednesday’s close and does not factor in the massive 6% drop on Friday. Therefore, I believe there is a high possibility that we see a further drop in the coming week, as speculators were likely pushed out of positions on Friday, given what was a significant outlier in terms of a 1-day price decline. In summary, while this reading is not showing any fear in the slightest, we have finally seen the bulls at least start to consider paring back some of their long positions.
Finally, moving to a daily chart of silver, we can see that the bulls were unable to defend $16.60/oz last week, but this level now remains a key pivot going forward. If the bulls can reclaim $16.60/oz this week by the Friday close, this support will move back in place, as I would consider last week’s decline merely a shakeout. However, we still have strong resistance at $18.95/oz overhead, and I would expect this area to be a brick wall of resistance until the small speculators start doing some selling. Therefore, I continue to believe this is a wise area to take profits on further rallies. While I would not be surprised to see silver head north of $20.00/oz by year-end, I’m less inclined to believe it will happen before May.
To summarize, I continue to see drops beneath $16.60/oz as buying opportunities but see no reason to chase above $17.00/oz. If the market does continue to rally, I would view the $18.95/oz level as a wise spot to book some profits. All of the time-frames continue to remain bullish for silver, but until the small speculators give up more of their positions, it’s hard to envision $19.00/oz being taken out.
The iShares Silver Trust (SLV) was trading at $16.08 per share on Tuesday afternoon, up $0.52 (+3.34%). Year-to-date, SLV has gained 0.56%, versus a 15.21% 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.