While it’s been a rollercoaster ride for gold (GLD), silver (SLV) has been much more volatile recently, plunging 4% on Wednesday to close below the pivotal $22.00/oz level. This key level represents a zone where the metal broke out from in July 2020 ($21.20/oz to $22.00/oz), and any break below the lower point of this range would be a negative development. Fortunately, the bulls are trying to play some defense in this area, and at the same time, we’re seeing sentiment move onto a short-term buy signal. In the past, sentiment buy signals have led to strong forwards returns for the metal and typically contained any further downside to 10% or less. This suggests that we are likely nearing a bottom in the silver price or have already stuck one. However, even more, important than sentiment in the technical picture, which sits at a critical point. Let’s take a closer look below:
(Source: Daily Sentiment Index Data, Author’s Chart)
As shown in the chart above, the violent 8-month correction since February for silver has finally forced many bulls to throw in the towel, with bullish sentiment sliding from 78% in February to just 20% this week. This massive erosion in bullish sentiment suggests that just 1 in 5 investors are bullish on silver, down from nearly 4 of 5 investors being bullish as we headed into the back half of Q1 2021. This is great news for the bull camp on a short-term basis, given that extreme pessimism typically translates to durable bottoms in the precious metals space. The last time sentiment was this bad was during September 2018, with the metal rallying more than 14% over the next five months and more than 34% over the following 12 months. This was a great time to be a silver bull, but one had to go against the grain and buy when everyone else was giving up on the metal. However, while sentiment is crucial to finding the path of least resistance in the precious metals markets, the technicals are just as important.
During September 2018, the bulls defended the important $13.65/oz level (December 2015 level), with a marginally higher low at $13.95/oz. The metal rallied off this low for over 30 trading days and then undercut this level two months later in November 2018. Fortunately, the bulls managed to defend this area once again on a monthly close, creating a short-term double bottom. We are currently at a similar juncture, given that bullish sentiment is again in the gutter, and silver is now testing a multi-year resistance level between $21.30/oz to $22.00/oz. The strongest breakouts do not re-enter their prior bases on a monthly closing basis, so this is a pivotal support zone for the bulls. A brief re-test of this area, as we saw on Wednesday, September 29th, is not the end of the world. However, staying below $22.00/oz would be a negative development.
We can see an example of these multi-year backtests in the S&P-500 below, which broke out across multi-year resistance in 1980, backtested two years later, but found support at this pivotal area. So, what happens here will be important. Therefore, how the metal acts over the next couple of weeks will be important. Continued weakness below $22.00/oz would be a negative development, while an immediate reversal here would not damage the big picture. For now, silver has rebounded, but we will need to see a rally above $24.00/oz to negate this shakeout and suggest this was merely a multi-year backtest of resistance.
So, what’s the best course of action?
My preferred way to play the silver price is GoGold Resources (GLGDF) personally, given that this Mexican silver producer remains in a strong uptrend and is sitting above its prior all-time highs despite the weakness in silver. However, with sentiment at its lowest levels in years, this is a low-risk area to start a position in silver, given that it’s sitting right up against what should be a multi-year support level. The caveat is that if this level cannot hold, I would not want to belong the metal, given that a failure to hold $22.00/oz could set up a drop below $18.00/oz. Often, the names that hold up the best during violent corrections are like beachballs being held underwater and massively underperform their peers when the bear market finally ends. For this reason, I remain long GoGold but have refrained from starting a new position in silver just yet. Going forward, getting above $24.00/oz is required to help silver return to a bullish short-term trend.
Disclosure: I am long 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 $20.51 per share on Thursday afternoon, up to $0.56 (+2.81%). Year-to-date, SLV has declined -16.52%, versus a 16.73% 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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