It’s been a rollercoaster ride for silver (SLV) investors the past two weeks, with excitement about $100/oz silver after Reddit set their eyes on the trade quickly dissipating. In fact, despite the Wall Street Bets crowd taking aim at the silver market, it was down for the week, closing well off of its highs. The good news is that while we saw significant chatter about the metal online, we haven’t seen this translate into exuberance yet, with sentiment readings still suggesting further upside for the metal over the medium-term (2-4 months). Therefore, while last week’s lethargic close was disappointing, I remain bullish on the metal over the medium-term and long-term.

(Source: Author’s Chart, CFTC Data)

If we take a look at small speculator positioning (blue bars) vs. the silver price above, we can see that long positioning remains near elevated levels at nearly 55,000~ contracts, but we are still outside of the danger zone above 65,000 contracts where we often see medium-term tops.

The fact that we had near-unprecedented chatter about the metal last week but did not see a stampede for exposure on this indicator is a positive sign because too much long exposure for this indicator often warns that the rally is on borrowed time. Based on a reading of just below 55,000~ contracts last week, this indicator remains neutral, suggesting that further upside and new highs above $31.00/oz are possible for the metal in the next couple of months.

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

If we look at another measure of sentiment, we can see that optimism has indeed returned, with long-term bullish sentiment up from 35% to 70% in just over a month. This sharp increase in bullish sentiment is because we’ve seen multiple readings above 90% bulls over the past two months for silver, which means that 9 out of 10 investors are bullish.

Generally, this is a warning sign short-term, but the good news is that we’ve seen some corrections along the way, like last week’s 10% drawdown. Currently, we remain on a neutral reading for this indicator as well, with long-term sentiment sitting near 70%. The ideal situation would be sentiment cooling off a little while the metal rallies, which would prevent us from seeing a sell signal for this indicator as early as March. Unfortunately, this is unlikely, as there’s nothing like price to change sentiment. In summary, while we’re not on a short-term sell signal here for silver, we could hit one by the first week of March if silver trades above $31.00/oz.

(Source: TC2000.com)

So, what’s the good news?

The good news is that silver did manage to get through key resistance last week and only has one short-term resistance level ahead, which is $28.90/oz. If the bulls can get through this level on a weekly close, there is no immediate resistance overhead until the 2012 highs. The other good news is that silver producers are set for an incredible year ahead if the silver price stays above $27.00/oz, with the average selling price for most producers being closer to $22.00/oz. Going forward, as long as silver remains above $26.55/oz, momentum will remain to the upside across most time-frames.

So, what’s the best course of action?

While investing in silver producers would be the obvious conclusion, many silver miners are trading at well above 20x earnings and they seem to be front-running a potential breakout through $31.00/oz for silver. Therefore, while the best names like Pan American Silver (PAAS) can be solid momentum names, those looking for value would be better to venture into the gold (GLD) sector where miners like Kirkland Lake Gold (KL) are trading for less than 9x FY2021 annual EPS estimates. Meanwhile, when it comes to silver, I see the metal as a hold here, but I would view any rallies above $31.50/oz as an opportunity to book some profits. This is because I would expect a correction if we do head above this level before May, given that sentiment would likely trigger a short-term sell signal.

Disclosure: I am long GLD, KL

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 $25.36 per share on Tuesday morning, down $0.03 (-0.12%). Year-to-date, SLV has gained 3.22%, versus a 4.27% 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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