It’s been a rough couple of weeks for investors in the silver (SLV) market, as the industrial metal has begun to underperform gold a little, sliding 7% the past two weeks vs. gold’s (GLD) 4.5% decline. This correction was healthy and necessary to help cool off sentiment after incessant calls of $50/oz and a massive silver squeeze in the past two months sent bullish sentiment through the roof. Fortunately, this 17% pullback in silver has put a small dent in sentiment, and has sent bullish sentiment readings down by more than 4000 basis points, from a reading of 90% to 45% as of Monday’s close.

Hopefully, this has helped kick most of the weak hands out of this trade and has also allowed many silver miners to shake out weaker-handed investors, with large-cap silver miners down from 40% from their February 1st highs. Let’s take a closer look below:

(Source: TC2000.com)

As shown in the chart below, sentiment for silver did not hit a sell signal in February at the time of the silver squeeze movement, but it did head into an area of caution, with two consecutive readings of 90% bulls. This suggested that 9 out of every 10 market participants was bullish on the metal, and when we have exuberance among investors in the short-term, we often see violent corrections of 10-15%. This is precisely what we’ve seen over the past few weeks in silver and was one of the reasons I have stayed far away from silver miners as they had a good chance of retracing their gap higher on February 1st.

With this gap now filled for most silver miners and any that chased the trade seeing massive losses in their accounts, we finally have sentiment back closer to an equilibrium. This is evidenced by the below chart, which shows silver sentiment at 45% as of yesterday’s close, even though silver hit a new 52-week high just five weeks ago. While we are nowhere near a buy-zone for silver, which would require a drop below 15% bulls, this is a major step in the right direction and has partially reset sentiment. Let’s take a look at the technical picture:

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

As shown below, silver continues to build out what looks to be a cup & handle pattern on its monthly chart, and this is a bullish pattern given that it’s being built on top of a multi-year breakout at $22.00/oz. In order to keep this pattern intact, though, we are going to see the bulls defend $24.00/oz at all costs and force a higher low on this pullback, and also start a new upleg soon, or this handle will begin to look abnormal. This is because the cup portion of this pullback lasted less than 5 months, and a 3-month handle would be very abnormal-looking.

Thus far, the handle portion of this pattern is on month #2, which is relatively normal, and doesn’t require any cause for concern.

So, what key levels should investors be watching?

(Source: TC2000.com)

(Source: TC2000.com)

If we look at the daily chart above, silver has short-term resistance at $28.90/oz, and a breakout above here would be a bullish development. If this correction continues, the $22.00/oz is a must-defend level; that is the key to keeping the long-term bull thesis intact.

For now, the metal remains in a wide range in a short-term correction and back below its prior resistance area of $26.55/oz. Given that gold is more oversold and has bullish sentiment readings that are consistent with intermediate bottoms, I see the better reward to risk trade as gold. However, if I wanted to own silver, I would be looking to buy the dip at $24.75/oz or lower, with a stop below $22.00/oz.

While silver miners and silver have cooled off considerably over the past few weeks, I still see the better value being gold, given that silver is stretched vs. gold over the short-term, and gold miners remain very attractively valued vs. silver producers. If I had to own a silver play, I believe one of the best plays is GoGold Resources (GLGDF), with the company focused on advancing its Los Ricos Projects in Mexico, and using cash-flow at its Parral Operations to fund development.

However, in terms of the best value play in the sector, I continue to believe it’s Kirkland Lake Gold (KL), and I have maintained my 18-month target price of $58.00, offering 75% upside from current levels. For now, I remain long gold and Kirkland Lake Gold, but I would consider starting a position in larger-cap silver miners if we do see more weakness in the coming weeks, which would allow their valuations to become more compelling.

Disclosure: I am long GLD, KL, 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.

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SLV shares were trading at $24.14 per share on Tuesday morning, up $0.82 (+3.52%). Year-to-date, SLV has declined -1.75%, versus a 3.92% 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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