It’s been a rough month so far for the silver (SLV) market, with the metal down 10% in less than 20 trading days, erasing its outperformance vs. the S&P-500 (SPY). Following last week’s negative reaction to the Federal Reserve Meeting, silver’s year-to-date return now stands at a paltry (-) 1%, vs. a (+) 12% return for the S&P-500. This significant underperformance has put a minor dent in the Silver/S&P-500 ratio. Fortunately, it hasn’t inflicted any material damage to silver’s technical picture or the Silver/Gold ratio, which continues to trend higher. The good news is that we continue to track quite similar to the early 2000 analog, with the base-on-base pattern still intact. Let’s take a closer look:

(Source: TradingView.com)

If we look at the chart above, we can see that silver broke out of a massive multi-year base in 2005 and spent nearly two years going sideways before resuming its trend and making new highs. Just last year, silver also broke out of a multi-year base to new highs and has spent nearly 12 months going sideways now in a volatile 25% range. This volatile range is likely frustrating many investors, but it’s pivotal to stay focused on the big picture. Unfortunately, many weak hands are shaken out during these base-on-base setups, left exiting near the lows in the early innings of a new bull market.

(Source: TradingView.com)

If we look closer at the chart, we can see that silver endured three violent corrections during its 2004/2005 base-on-base setup, with each being successively smaller. This suggested that there was less and less supply to go around as the base developed, with silver soaring more than 80% in 12 months once it finally broke out. So far, we are seeing something quite similar in the current pattern, with last week’s decline representing another higher low for the time being. Assuming the $24.50/oz level holds, we would confirm a higher low in line with the bullish pattern that developed over 15 years ago.

(Source: TC2000.com)

To continue tracking in line with the previous pattern that began a historic bull market in silver, we want to see $24.50/oz defended. If this level were to break, the $22.00/oz level becomes pivotal, with this being the main support for this current base-on-base pattern. The good news is that with silver already starting to become short-term oversold last week, the conditions are in place for further weakness below $25.00/oz to be a bear trap. Therefore, if silver does continue its sell-off and dip below $25.00/oz, it’s likely this decline will be on borrowed time.

(Source: TC2000.com)

So, what’s the best course of action?

While I am not long silver currently, I would be paying close attention to selling exhaustion if this decline continues. We’ve already seen a significant improvement in sentiment, with the percentage of bulls down from 80% to 30%, and the key now will be a sharp reversal to confirm buying support. Based on the similarity to the 2005 analog, I would expect further weakness to present a low-risk buying opportunity, and I’d ultimately expect a breakout through $31.00/oz before year-end. Given this expectation, I would view any dips below $24.60/oz as low-risk buying opportunities.

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 $23.89 per share on Tuesday morning, down $0.19 (-0.79%). Year-to-date, SLV has declined -2.77%, versus a 13.33% 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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