The precious metals complex has had a rough stretch since August, with the price of silver (SLV) underperforming the S&P-500 (SPY) by 3100 basis points in just four months, which has taken the wind out of most silver investors’ sails. Fortunately, this pullback has done any lasting technical damage, and the bullish long-term picture continues to remain intact.

The issue is that every single rally in the silver market brings out a heavy dose of bullish fervor, with sentiment soaring to nearly 60% bulls this week despite only a minor recovery in the metal. This mixed sentiment has made the prospects for a bottom in December less clear as investors are not as easily excitable after we’ve seen a capitulation and durable bottom. Let’s take a closer look below:

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

Beginning with a chart of bullish sentiment for silver, we can see that optimism has soared in the past week, even though silver has bounced barely 10% from its recent low. This is a negative development compared to past rallies, as the 24% rally in eight days for silver near the March bottom still saw the metal trading below 30% bulls, telling us that investors had completely thrown in the towel and were not in a rush to get back in the market.

Currently, investors in the silver space seem to be easily excitable as they’re getting quite optimistic relative to the movements in price, which suggests we may need either a re-test of the $21.50/oz low or an undercut to make them finally throw in the towel. While we got very close to capitulation in early December with sentiment dropping to just 17% bulls, the recent spike in bullish sentiment has made the prospects of a bottom in silver less clear currently.

(Source: CFTC.com, Author’s Chart)

We see a similar picture from a positioning standpoint, with long positions among small speculators never really registering any sign of capitulation. In fact, small speculator positioning dropped into negative territory in May 2019, and fell to below 30,000 long contracts in March, and continued to fall while the price of silver rallied. In the current scenario, small speculator positioning did drop below 30,000 contracts briefly but has continued to increase over the past three months while silver has continued to correct.

This suggests that investors are getting more bullish and more anxious to add exposure despite lower prices, which is a less clear sign of a bottom. Ideally, we want to see investors panicking and cutting their positions during sharp corrections, and ideally not being in a rush to add back exposure when the metal finally does bottom.

If we combine this chart with Daily Sentiment Index data, there is no clear capitulation sign yet. It’s important to note that bottoms can occur without capitulation, but the current readings suggest a 50% probability at best of whether we’ve seen the low for silver at $22.00/oz.

(Source: TC2000.com)

(Source: TC2000.com)

Fortunately, the technical picture remains solid for silver, with the potential for a large cup base being built on top of the previous multi-year resistance level (green box). The yearly breakout shown above is a very bullish development, which suggests that investors should give the benefit of the doubt to the bull camp. Still, we’re going to need a weekly close above $26.55/oz to increase the probability that this correction is over. Therefore, while silver is holding up quite well and the bulls have played defense exactly where they need to, I would not say we’re out of the woods entirely just yet. For now, the key is for the bulls to continue defending $21.50/oz on a weekly closing basis, which lines up with the yearly pivot for the 5-year breakout.

So, what’s the best course of action?

As noted in last week’s update, I see no problem with nibbling on positions in silver miners given that they’ve corrected sharply, but I still don’t see a low-risk entry for silver at current levels. I continue to believe the best silver miners to focus on are those that saw free-cash-flow surge this year and are paying quarterly dividends, with these two names being Wheaton Precious Metals (WPM) and Pan American Silver (PAAS). For now, I continue to remain bullish long-term on silver, but until we see a clear sign of capitulation, I have no plans to start a position in the metal itself. Instead, I see the best way to play silver being the miners, with investors getting paid to wait and getting production growth from both WPM and PAAS.

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 rose $0.20 (+0.90%) in premarket trading Thursday. Year-to-date, SLV has gained 34.65%, versus a 15.37% 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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