It’s been a volatile month thus far for the precious metals sector, with silver (SLV) taking the brunt of the selling pressure. This is quite disappointing in an inflationary environment when many investors are expecting metals prices to provide a hedge and safe haven. Fortunately, silver has recovered from its lows last Sunday; but it’s still down more than 10% year-to-date and down nearly 21% from its February highs. The good news is that we’ve seen minimal damage to the long-term picture, but that is contingent on the bulls playing defense immediately. Let’s take a closer look below:

(Source: TC2000.com)

As shown in the chart above, it’s been a volatile week and a half for silver, with the metal plunging more than 8% in a single trading session last Sunday but managing to find support at the critical $22.00/oz level. The price has since recovered, but the negative development is that prior support at $24.75/oz has been broken, and we now have new resistance at $26.35/oz. The two silver linings are that this correction has been so violent that we’ve seen what looks to be possible capitulation from the bull camp, and the monthly chart remains intact. This is evidenced by the fact that bullish sentiment for silver plunged to 12% bulls last week, with the long-term moving average dipping to 30% bulls, its lowest reading in more than two years. A low sentiment reading on this indicator does not guarantee that the bottom is in. Still, typically, we have seen important bottoms formed in this area with similar levels of despondence. So, with this trade having gone from exuberance at the time of the WSB short squeeze attempt to disgust six months later, it’s time to be open-minded about a potential bottom forming.

(Source: Daily Sentiment Index Data)

If we look at the technical picture, we have a clear downtrend in place over the past few months, with many investors likely regretting rushing into the metal during the attempted short squeeze in late February. However, while momentum is clearly to the downside short-term, the bigger picture remains bullish. This is because silver continues to trade in a base-on-base pattern that’s being formed above a multi-year resistance level, with base-on-base patterns being quite bullish. The key, however, to confirming silver is ready to begin a new multi-year uptrend will be a monthly close above $30.00/oz. This would confirm a breakout from the base-on-base pattern and move momentum back to the upside across all time-frames. It’s important to note, though, that this base-on-base pattern will become invalid below $22.00/oz on a monthly close and would flip to a bearish setup. Therefore, the bulls must play defense if we see any further weakness.

(Source: TC2000.com)

So, what’s the best course of action?

With silver deviating from its 2004-2005 analog, the path forward for the remainder of 2021 has become less certain, especially with momentum to the downside across lower time-frames. However, with a clear range in play, the lowest risk trade looks to be buying any dips below $22.50/oz and selling into resistance, which now lies at $26.00 – $26.35/oz. Ultimately, the metal could head much higher after shaking out many of the weaker-handed bulls, but with much of this base being built below the 200-day moving average, the odds of a breakout this year are less certain. For now, I remain long GLD and silver miners like GoGold Resources (GLGDF) from much lower levels but have no plans to start a new position in silver just yet. A re-test of the recent lows at $22.20/oz is possible, and it’s imperative that the bulls play immediate defense in this area if this occurs.

Disclosure: I am long GLD

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 $21.90 per share on Tuesday afternoon, down $0.20 (-0.90%). Year-to-date, SLV has declined -10.87%, versus a 19.54% 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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