It’s been a volatile week for the precious metals sector, while the S&P-500 (SPY) has continued its unabated ascent to new highs. Fortunately, both gold (GLD) and silver’s (SLV) volatility has resulted in some upside this week, a welcome surprise, with silver reversing off its lows to close the month just above $24.00/oz. While there’s no guarantee that the lows are in yet, the drop below $24.00/oz has begun to reset sentiment. Also, the immediate buying support suggests that the bulls continue to play defense where they need to above last year’s breakout level. Let’s take a closer look below:

(Source: TC2000.com)

As shown in the chart below, silver sentiment has finally dropped back below 25% bulls, suggesting that the bulls that piled into the trade hoping for a squeeze might be beginning to bleed out their positions. For nearly six weeks, the correction in silver was not translating to any real fear among investors, but this week’s decline did result in some anxiety. This drop to 25% bulls did not translate to a buy signal, and this indicator remains on a neutral reading, but it has resulted in a minor wash-out in sentiment. Sometimes, this can be enough to signal a bottom in an asset, but a decline below 20% bulls would be ideal for complete cleansing of the bulls.

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

Moving over to the silver/gold ratio, we’ve seen the indicator bounce precisely where it needed to confirm the uptrend remains intact. This is a good sign for both metals, increasing the probability that this 8-month correction was merely a violent pullback, and not the first leg down after a bull market peak. As shown above, the silver-gold/ratio is now nearing its 200-day moving average, and this recent outperformance suggests that the bull market in both metals remains healthy and intact. Let’s see what the technical picture looks like:

(Source: TC2000.com)

If we look at the monthly chart, silver broke out of a multi-year base last year and is now building a new base above its prior resistance. We have a very volatile range here of $22.00/oz to $30.00/oz, with the best course of action being buying near the lows of the base at $24.00/oz or lower, and looking to take some profits closer to resistance near $29.00/oz. The pullback this week represented an opportunity to start a small position in silver, and I now see the metal as a hold. If silver were to dip and undercut its recent low to test the $23.50/oz area, this would set up another low-risk buying opportunity and likely help to further reset sentiment.

(Source: TC2000.com)

While the silver sentiment is not overly negative, the 20% correction has helped the metal reach a short-term oversold condition, setting up a low-risk buy point for silver miners and silver earlier this week. The next key resistance point is $28.90/oz, with strong support continuing to sit at $22.00/oz.  Generally, multi-year breakouts signal the beginning of new bull markets, not the end of them, and the massive breakouts in gold and silver suggest that we are still in the earlier innings here of a larger multi-year move. So, as long as the $22.00/oz level is defended, I see no reason to doubt the bull market, and I would view any pullbacks below $23.50/oz as a low-risk area to start a position in the metal.

Disclosure: I am long GLD, SLV

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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