We’ve seen a minor changing of the guard over the past month, with the previously hated precious metals complex coming back into favor, while the Nasdaq Composite (QQQ) has corrected sharply. The leader in the precious metals space has continued to be silver (SLV), which is up 11% thus far in Q1, clawing back all of its year-to-date losses. This relative strength amid weakness in the major market averages is a good sign, as is the metal’s outperformance vs. gold (GLD), which denotes a healthy precious metals market. Even better, despite the strength, we haven’t seen any signs of exuberance yet in silver, and bullish sentiment is resetting. Let’s take a closer look below:

(Source: TC2000.com)

As shown in the chart below, sentiment has improved considerably over the past few months, with bullish sentiment for silver sitting near 50% bulls and the long-term moving average plummeting from a reading near 80% to closer to 40%. This 4000 basis point improvement in bullish sentiment has helped to reset the silver market from an unhealthy amount of optimism in early February, which impeded the market’s parabolic rally. While this current reading of 40% bulls for the long-term moving average is nowhere near a buy signal, which we last got in 2018, it is a massive improvement and nearing a level where we’ve seen cycle lows in the past. At the most recent cycle low in December, the sentiment moving average dipped to 33% bulls before the metal turned higher and put together a two-month performance.

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

Over the past week, bullish sentiment for silver has continued to climb, but despite this rally, bullish sentiment has not become frothy like in past rallies and is sitting near 50% bulls. These subdued readings combined with the elevated readings from January and February being rolled off have moved this indicator to a neutral reading with a slight bullish tilt, from a previous neutral reading over the past month, and a slightly bearish reading in early February. When this indicator moves to a slightly bullish reading, this is a tailwind for rallies, given that silver can climb a wall of worry.

This is the opposite of what we saw in late January when everyone was bullish, and markets rarely sustain their rallies when the majority are already bullish. The best thing for silver would be continued consolidation inside this multi-month base we’ve been building since last year to shake more weak hands out of this trade.

(Source: TC2000.com)

If we look at the technical picture, we can see that silver has resistance at $28.90/oz, short-term support at $25.25/oz, and strong support at $22.00/oz. For the bigger picture, the key for the bulls is defending $22.00/oz, which will keep the monthly chart bullish. In the short term, breaking out above $28.90/oz would set up a rally to above $33.00/oz and confirm the yearly breakout we saw last year. However, with silver in the upper portion of its larger range, I don’t see a low-risk buy opportunity just yet at $27.00/oz.

So, what’s the best course of action?

Given that silver continues to trade in a choppy range, I see the best course of action as adding exposure at $25.25/oz and increasing exposure closer to long-term support at $22.00/oz. Dips to these levels would likely coincide with a more bullish tilt for sentiment, and it’s generally been wiser to buy support in silver and trim near resistance vs. buy breakouts over the past several months. If we do see continued weakness in the silver market, I don’t see any reason to get concerned, as long as $22.00/oz is defended. As long as this level continues to act as support, silver will remain in a bull market, and 20% pullbacks within bull markets from the highs typically provide excellent buying opportunities. Based on a recent high of $30.20/oz, the lowest risk buys can be initiated at the $24.15/oz level or lower.

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.

SLV shares were trading at $25.08 per share on Thursday morning, down $0.01 (-0.04%). Year-to-date, SLV has gained 2.08%, versus a 10.30% 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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