After an alarming drop in the price of silver (SLV) from early February to late March following the WallStreetBets [WSB] attempt at a silver squeeze, the price of silver has finally begun to find some support,  heading into the end of April with a 7% monthly gain. This support has come at just the right time for the metal and allowed silver to make a higher low for the time being near $24.00/oz, but the even better news is what it’s done for sentiment. Despite working on a third consecutive weekly gain, bullish sentiment is not increasing and has cooled off considerably from February levels. Not only has this allowed silver to evade a short-term sell signal, but it’s also providing fuel for the next leg higher, with the trade now being much less crowded. Let’s take a closer look below:

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

As shown in the chart above, bullish sentiment for silver came dangerously close to a sell signal earlier this year with an attempted short squeeze on the metal orchestrated by WSB and upbeat sentiment around silver’s role in electrification. While the latter development certainly holds some merit and should provide a long-term tailwind for silver, when an asset class sees irrational exuberance short-term, it often needs a 15% to 20% correction to reset sentiment. Fortunately, silver avoided this sell signal which could have been a major impediment to performance until summer, and the correction back to the $24.00/oz level has mostly reset sentiment. This is evidenced by the fact that the moving average for bullish sentiment has dropped from 79% bulls to 49% bulls, a 3000 basis point improvement in just two months. While this is nowhere near a buy signal, it has helped this indicator improve to a neutral reading.

If we look at the technical picture, we can see that silver broke out of a multi-year base last year and has been building a new base on top of this base between $22.00/oz and $30.00/oz. The fact that silver has not re-entered its base is a positive sign that suggests this breakout will likely be a successful one, and the recent consolidating has been quite healthy. This is because it allowed sentiment to cool off (as shown above) and has given silver’s monthly moving average (teal line) time to play catch-up. Generally, this moving average is a floor in bull markets, and it will come in at $22.00/oz by the end of May. Therefore, even if silver does need to re-test the lows of this base before attempting a breakout from this new range, I would expect the metal to find strong support there.

(Source: TC2000.com)

So, what’s the best course of action?

With strong support for silver at $23.50/oz to $24.00/oz and short-term resistance at $28.90/oz, the lowest-risk trade is looking to go long silver as close to $24.00/oz as possible and scaling out of the majority of one’s position as silver approaches the $29.00/oz level. Obviously, with demand from solar and a recent multi-year breakout, it’s possible that silver could head above $30.00/oz and finally break out of this 9-month range. However, it’s just as possible silver could consolidate for another six months before breaking out, which is why it makes sense to trade the range, and sell most of one’s position near $29.00/oz.  For now, I remain long gold, given that sentiment is much more bearish in gold, so I see less downside risk. However, I may look to start a new position in silver if the metal drops below $23.80/oz.

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 $24.11 per share on Tuesday morning, up $0.13 (+0.54%). Year-to-date, SLV has declined -1.87%, versus a 10.81% 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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