While all of the major markets have suffered deep corrections this week, investors in silver (SLV) continue to get hit the hardest, with the metal down 22% from its highs, holding only slightly above its late September lows.
 
Generally, a decline of this magnitude would lead to a complete washout in sentiment. However, as of Wednesday’s readings, the sentiment moving average for silver is still nowhere near an area where we typically see troughs. Worse, most silver miners (SIL) continue to make new lows well ahead of the metal, suggesting that there’s minimal demand for silver stocks out there.
 
Given that we still have no evidence of capitulation and momentum remains to the downside, I see no reason to be aggressively buying silver nor silver miners here.

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

Some investors might have concluded that Wednesday’s sector-wide smash in silver miners might have finally led to some panic selling, but we haven’t seen any real evidence of this when it comes to silver. As of Wednesday’s close, bullish sentiment for the metal sits at 19%, which, while low, is not a reading that inspires confidence of a bottom after a drop this large. In fact, bullish sentiment for the S&P-500 (SPY) is already at 25% after just a 9% correction, and bullish sentiment on gold (GLD) is at the same levels as silver after an 11% correction.

The fact that the silver bulls continue to cling to the bullish thesis without wavering suggests we may still need a re-test of the $21.50/oz to wash them out as this would likely send bullish sentiment below 10% bulls. As the above long-term moving average for silver’s sentiment, we are not yet at areas where we see a trough, which is typically at 40% bulls or lower.

(Source: CFTC.com, Author’s Chart)

If we take another look at sentiment for silver based on positioning, there’s not a lot to like here either. As we can see, small speculator positioning for silver remains quite high given that we’re in a deep correction, and small speculators have actually been increasing their exposure significantly over the past several weeks.

In fact, bullish positioning remains just shy of where it was when silver hit a new multi-year high at $30.00/oz and has increased by over 60% from when silver saw its initial leg down off the peak (45,000 long contracts vs. 27,000 long contracts). Generally, the small speculators get it wrong as they have in the past, and it’s not until they throw in the towel that we see a durable bottom.

While the initial drop to 26,000 contracts suggests that that may have been the bottom at $21.50/oz, the fact that they’ve been adding during weakness for the metal makes this a less reliable signal. Let’s see what the technical picture looks like:

(Source: TC2000.com)

As we can see from the daily chart, silver broke its uptrend line in September, which was a red flag, and the metal has since made minimal progress after finding a low on September 24th. The only good news is that this correction has allowed the 200-day moving average (yellow line) to play catch-up, but the bad news is we have a brick wall of resistance at $26.55/oz. Until this level is reclaimed by the bulls, I see no reason to get excited over rallies in the metal.

Meanwhile, on the downside, the bulls have to play defense if we do re-test $21.50/oz. Any violation of the $21.50/oz would be a bearish development and begin to negate the breakout we saw in Q3.

Given that most silver miners continue to lag the metal significantly and haven’t seen any evidence of capitulation, I continue to prefer gold miners with better margins and stronger technical charts.

Until we see some sign of accumulation in the silver miners, which would be shown by a strong monthly reversal on increased volume, I see no reason to be aggressively buying in the space. For now, I continue to remain long gold as it’s the strongest metal but have no plans to start a position in silver until the bulls can start playing better defense or we see evidence of panic selling. There’s no question the selling has been significant since the August highs, but I’m not convinced we’ve seen complete panic yet, which often marks a tradeable low.

Disclosure: I am long GLD

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 $21.59 per share on Thursday morning, down $0.19 (-0.87%). Year-to-date, SLV has gained 29.44%, versus a 3.38% 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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