It’s been another rough week for the precious metals sector, with the price of silver (SLV) plunging more than 4% to undercut the $23.00/oz level, extending its year-to-date losses to nearly 14%. This has made silver one of the worst-performing asset classes of the year behind the Solar ETF (TAN) and Palladium (PALL), with silver now among the ten worst performing ETFs year-to-date.  The silver lining is that the metal is oversold short-term, and sentiment is at its worst levels in years, but while this provides the conditions for a durable bottom, the key for the bulls will be defending the $22.00/oz level at all costs. A breakdown below this level would be a bearish development for silver and silver miners. Let’s take a closer look below:

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

Despite some of the highest inflation readings in a decade, the precious metals have been anything but a sanctuary, currently registering as the worst-performing asset classes of 2021. Not surprisingly, this has put a massive dent in bullish sentiment readings, with silver now one of the most hated asset classes on the planet from a sentiment standpoint. This is evidenced by silver’s long-term moving average for bullish sentiment dipping below 24% this week, the lowest reading for this indicator in nearly three years. The last time an asset class became this hated was crude oil (USO) in April 2020, and while oil headed 5% lower, April ended up being a major bottom for the commodity. There’s obviously no guarantee that history repeats itself with silver, but when an asset becomes this detested, it’s wise to be open-minded for signs of a bottom. However, while sentiment will finally move onto a short-term buy signal on Friday, September 17th, the technical picture remains under pressure and is still just outside of a key oversold zone.

(Source: TC2000.com)

If we look at the chart above, we can see that meaningful bottoms in silver have occurred when silver has dipped below the (-) 10% level (green line) in terms of trailing-twelve-month returns, and we are heading towards this level with silver’s plunge this week. Over the past four years, we’ve seen three instances where we hit this reading: July 2017, August 2018, and March 2020, and all three instances were within 5% of bottoms in the metal. It’s worth noting that there was one false start for this indicator in December 2017, but silver was up 6 out of 7 weeks in a row by more than 14% following this signal, providing a solid short-term trade to the upside. As we can see on the right side of the chart, we have yet to drop into the oversold zone for silver, but any dip to the $22.00/oz level would satisfy this requirement. Like sentiment, there is no guarantee that this indicator bottoms out the metal, but we are beginning to see a perfect storm of conditions in place to support a meaningful bottom.

So, what’s the best course of action?

(Source: TC2000.com)

As the technical picture shows above, silver is coming into a very important support level at $22.00/oz, and if this support level holds and we can reverse back above $25.00/oz, this would be a bullish development. This is because it would be a false breakdown followed by a move back above key resistance, which would shake many weak hands out of the trade. However, if this $22.00/oz level cannot hold on a weekly close, this would be a bearish development unless it is immediately reclaimed. This is because this has been a 1-year support level for the metal following a multi-year breakout, and the strongest breakouts do not re-enter their prior trading ranges.

Given the mixed short-term outlook, I may consider starting a position in silver below $22.50/oz, with a stop below $21.00/oz. However, my preferred way of playing the trade is with GoGold Resources (GLGDF), a Mexican silver producer that is not only outperforming silver but above a rising 200-day moving average. This is my preference because I prefer playing uptrends vs. ranges. However, if I wanted to be long silver, I would be looking to initiate a starter position if we see any further weakness below $22.50/oz. The key going forward will be the $22.00/oz level for the bulls, with key support for GLGDF sitting at US$2.10, where I would consider adding to my position.

Disclosure: I am long GLD, 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.

SLV shares were trading at $21.09 per share on Thursday afternoon, down $0.98 (-4.44%). Year-to-date, SLV has declined -14.16%, versus a 19.90% 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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