It’s been one of the most exciting weeks in years for the precious metals (SLV), with the so-called Reddit army setting their sights on the silver market after causing some turbulence for some funds in two-week targeting highly-shorted stocks. Unfortunately, while they move out of the gate was impressive for silver on Monday, with the metal briefly trading above $30.00/oz, the follow-through has been pathetic, with the metal dropping back below its breakout area on heavy volume.

Obviously, one day and a single throw-back to resistance do not suggest this breakout is a failed one, but the bulls are going to need to get back above $29.00/oz before the weekly close to make this breakout look convincing. Until that occurs, this breakout looks unconvincing, especially considering that the larger markets (gold and the US dollar) did not confirm the move.

(Source: TC2000.com)

As shown in the chart above, silver built a 20-week cup & handle base since its August highs and broke out of this area on massive volume yesterday. However, following the market close, the metal fell back right inside its base, dropping below the key $28.90/oz level, which would have confirmed the breakout. A retracement inside a breakout level is generally a bearish sign unless it’s reversed immediately, and this has been a significant retracement, with silver down more than 7% from its breakout level. While all is not lost yet, and the bulls could put up a fight between now and Friday’s close, I would consider any weekly close below $26.55/oz to be a bearish development, and I would not consider this breakout as successful unless the metal closes the week above $29.00/oz.

(Source: TC2000.com)

Fortunately, if we look at the weekly chart, we haven’t seen any real technical damage yet, other than a terrible looking breakout for the time being. This significant rejection back below the $28.90/oz level is not a deal-breaker, but the bulls are going to need to defend the $26.55/oz level, which was previous resistance, to keep this bullish pattern intact. Currently, the big picture for silver remains bullish and will as long as the metal is above $22.00/oz.

Still, the fact that silver broke out with a muted response from gold and despite minimal weakness in the US Dollar (UUP) suggests that this move is likely to be a failed breakout. This is because the most decisive moves for silver occur during periods of weakness for the US Dollar, and the US Dollar has actually been trending higher since the start of the year. Many have argued that this makes zero sense with money printing continuing, but for the time being, the US Dollar is the best house in a bad neighborhood of other currencies with similar stimulus and lower interest rates.

While I am the furthest thing from a US Dollar bull, the failed breakouts among most silver stocks and the sharp retracement in silver is not an ideal development and certainly puts the recent breakout in question. This doesn’t mean that one should rush out and start dumping their silver stocks, but I would not be in a rush to be adding new exposure here because the time to be picking up silver stocks was last week or earlier in the year.

Currently, I continue to see valuations among most silver producers as the most expensive they’ve been in years relative to gold producers, evidenced by names like First Majestic Silver (AG) trading at over 30x FY2021 annual EPS estimates of $0.60 at above $19.00 per share. Conversely, investors can buy names like Kirkland Lake Gold (KL) for barely 9x FY2021 annual EPS estimates of $4.15. Therefore, I continue to remain focused on accumulating the highest-quality names in the gold sector for long-term accounts. While I see silver as a hold here if I was long from below $24.00, the bulls have to hope they can defend the $26.55/oz level on a weekly closing basis to keep this pattern from failing. Until the bulls get above $29.00/oz, I see no reason to get excited about a breakout, and I would be cautious about being overweight silver miners like First Majestic at current levels.

Disclosure: I am long GLD, KL

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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SLV shares were trading at $24.80 per share on Tuesday morning, down $1.96 (-7.32%). Year-to-date, SLV has gained 0.94%, versus a 2.08% 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. More...

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