While the major market averages continue to climb towards their previous all-time highs, most commodities have taken a beating since August, with silver (SLV) being the hardest-hit of the group. Many investors were hoping that a stimulus bill agreement and continued dovish commentary from Fed Chairman Powell last week would light a fire under the metal, but this has not been the case at all. Unfortunately, silver remains 20% below its August highs and has been unable to gain any real traction since its late September low.

Some investors will point to the fundamentals, manipulation, and supply concerns as reasons for new all-time highs this year. Ultimately, it’s the technical picture and sentiment that dictate where the metal is headed over the short-term and medium-term. Given that there’s no clear sign of capitulation yet, and the bears continue to successfully defend the $26.55 resistance level, we still do not have an all-clear signal to get aggressive with either silver or silver miners.

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

As noted above, sentiment is one of the best predictors of 3-month and 6-month returns, and if we look at the chart above, it was flashing a significant danger signal just two months ago. While scanning gold sites and tallying up the number of bullish headlines was an easy way to judge this, the Daily Sentiment Index data confirmed this, with bullish hitting a multi-year high of 97% bulls, suggesting that everyone was in the pool.

Not surprisingly, the metal has performed poorly since, down nearly 30% from its 52-week high. Some bulls will look at the above chart and be impressed at how sentiment is now back in neutral territory, with a brief dip towards 30% bulls.

However, this is the bare minimum reading we would expect after a 30% decline. Typically, we see a drop to single-digit readings for bullish sentiment after corrections of this magnitude. Therefore, while this is undoubtedly an improvement, I would prefer to see capitulation here in sentiment to increase the probability that the low is in.

(Source: TC2000.com)

If we look at the technical picture, we can see that a 10-15% decline would have done minimal technical damage, but the fact that we dropped 20% has left silver well below its yearly uptrend line. This is not ideal, as any rallies towards the $26.55/oz area will only be re-tests of the underside of this uptrend line.

It’s certainly possible that the bulls could get through this level, but the $26.55/oz area is now key to confirming the correction is most likely over. For now, we have pivotal support at $21.50/oz that the bulls must continue to defend, but I see no reason to get overly excited about rallies unless the bulls can power through $26.55/oz.

(Source: TC2000.com)

Fortunately, the monthly chart still remains intact, as the metal is hovering above a massive breakout. However, the volatility following this breakout is a little abnormal, and the bulls must play defense at $21.50/oz to increase the likelihood that this was a real breakout.

There is absolutely nothing wrong with some messiness after a breakout, which often shakes out weak hands, but a complete retracement of this size breakout would be a bearish development. Therefore, not only is $21.50/oz pivotal to the daily picture, but it’s a must-hold level in the bigger picture.

So, what’s the best course of action?

Given that silver is much weaker than gold, and there’s no sign of capitulation in bullish sentiment yet, I continue to favor gold miners as they have more attractive valuations and much more attractive charts.

I also prefer gold (GLD) to silver, as gold made a new all-time high, but silver did not. However, there is one silver name that has a large exposure to gold that’s been acting exceptionally well. This company is Pan American Silver (PAAS), a gold-silver producer based out of the Americas that’s near its all-time highs while silver is still miles below its 2011 all-time high. Given the multi-year breakout we’re seeing built here, I believe any pullbacks to the $29.50 level would be low-risk buying opportunities.

Currently, the stock is one of my largest positions, and I remain long from a cost basis near $29.00.

(Source: TC2000.com)

Silver continues to remain bullish on its long-term charts, but until we get through $26.55/oz, aggressively adding positions could backfire. Therefore, I continue to wait patiently for either capitulation or a break above $26.55/oz, which would increase the probabilities that the low is finally in for silver.

For now, I see no reason to be adding too much exposure, and my favorite idea in the space is Pan American Silver, which is expected to have back-to-back years of triple-digit earnings growth even after the recent slide in silver prices. For me to remain bullish long-term, the bulls must defend $21.50/oz at all costs.

Disclosure: I am long GLD, PAAS

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 . Year-to-date, SLV has gained 35.43%, versus a 9.52% 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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