It’s been another rough week for gold (GLD) and silver (SLV) investors with the bleeding continuing for the fourth month in a row in the metals complex. While the delayed stimulus has certainly tempered the bullish picture short-term for the metal, the continued weakness in the space has some already worried that we’ve just seen a 2011 style market top.

Obviously, anything is possible, and we could have seen a multi-year top in the market, but the weight of evidence suggests that this isn’t the case. Unfortunately, the issue is that we still don’t have any sign of capitulation in silver which would increase the probabilities that a low is in. Let’s take a look at the bull and bear case below:

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

Beginning with the sentiment, there is a case to be made that the low isn’t in yet, as sentiment continues to hover near 30% bulls. While this doesn’t preclude a bottom in silver, the majority of durable bottoms for silver have occurred with a sentiment reading below 10% bulls, and we are nowhere near that level currently.

Therefore, it would be ideal to see a drop below 10% bulls on silver at a bare minimum, especially considering how far the metal has fallen from its August highs. To put in perspective how elevated the current reading is, the S&P-500 (SPY) generally falls to below 20% bulls after just a 10% correction, so a drop to only 17% at the October reading for silver after a 27% correction is a little strange.

(Source: TC2000.com)

If we look at the technical picture, the bulls have continued to defend the $21.50/oz level, but they haven’t been able to gain any real traction since. As shown above, the metal continues to trade in a volatile range between $21.50/oz support and $26.55/oz resistance, but rallies are running into strong selling pressure near the $26.00/oz level.

For the probabilities to increase that we’ve started a new up-leg in the metal and that this correction is over, we are going to want to see the bulls push through $26.55/oz with ease. Until this happens, a re-test of break of the $21.50/oz low remains on the table.

So, is there any good news?

While this correction has undoubtedly been nasty, the good news is that the silver/gold ratio remains above its key monthly moving average, and has barely budged during this correction. In fact, while gold broke its August panic lows, silver is still nearly 10% above that panic low above $23.00/oz.

If this were the end of a bull market and the beginning of a new cyclical or secular bear markets like 2011 and late 2016, we would expect silver to be significantly underperforming gold currently, and breaking down.

This does not mean that silver can’t play catch-up to the downside, but as long as the silver-gold/ratio continues to remain above this key moving average, the odds suggest this is a buying opportunity vs. a panic-selling opportunity like many are doing currently.

(Source: TC2000.com)

What’s the best course of action?

Unfortunately, while this does point to this being a buying opportunity for miners and silver vs. a selling opportunity, we remain in a sharp downtrend for the time being, so I have not put any considerable amount of money to work yet. This is because I am waiting for some signs of a reversal before buying vs. jumping in and putting all my money to work in more of a ‘falling knife’ setup across the sector.

The first sign of a change of character would be a close above $24.50/oz this week on silver which would suggest that this week’s selling was a bear trap.

However, until we see some sort of bullish reversal or traction to the upside, I don’t see any reason to be overly aggressive just yet. For now, I continue to remain gold, and Kirkland Lake Gold (KL) and Newmont (NEM) which are my two favorite miners, but otherwise continue to hold a lot of cash until we see evidence of complete capitulation or a turn in the technical picture.

This correction might be brutal, but the bull market is far from over, and investors should remain open-minded to a strong upside reversal for the metals complex as long as silver stays above $21.50/oz.

Disclosure: I am long GLD, KL, NEM

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 $21.60 per share on Tuesday afternoon, down $0.33 (-1.50%). Year-to-date, SLV has gained 29.50%, versus a 14.38% 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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