Published 03/09/2019

We have turned neutral on silver. Those who followed our analysis on silver know that we publicly shared an attractive risk/reward setup in silver on November 14th, 2019. Subsequently, silver rallied more than 30%. We cashed in on the idea in a portfolio context and it is time to do the same on the standalone basis. We’ll elaborate in this write-up our motivation.

One major reason behind last year’s idea was a significant support level that was just 3% away and acted as an invalidation or stop/loss to the analysis. The threshold was within reach back then at the same time that a complete Elliott wave pattern along pessimistic sentiment characterized the overall picture in silver. The idea proved correct and silver outperformed its precious metal siblings subsequently. The bad news is that it did not happen unnoticed as silver received broad-based attention in the media. An overly optimistic sentiment picture formed most recently. Money managers and speculators are approaching levels of long exposure that are comparable to September 2017 according to exchange data. Meanwhile, many analysts are calling a massive bull run in gold and silver. It seems almost like a contest about who can come up with a justification for the highest target. Most often, extreme consensus turns out in a surprise. Therefore, it seems concerning to see this kind of general attitude at this particular junction. We’ll elaborate this in technical terms.

Silver rallied from November 2018 within two distinct trends, which are highlighted in light and dark grey, to the upside. The initial rally formed a base channel (lighter grey) whereas the sharp increase from May 2019 unfolded within an acceleration channel (darker grey). Price action broke through significant resistance levels and showed a strong rally to the upside. However, the technical picture became tricky because the blue-dotted horizontal lines highlight long-term support levels, which traders most likely focus on. Both levels initiated larger swings during the past years. A retest of these levels is likely before silver continues its journey along with an upside trend. Our base-case scenario for the journey is depicted in red. The red path breaks the darker grey acceleration to the downside and spikes after that to the upside. However, a larger corrective pattern is not entirely off the table. The larger corrective pattern is depicted in black and has lower odds than the red scenario if silver recorded a cyclical low in November. However, the risk at this junction is that the black path could set the stage for a much larger correction to the downside.

Source: Tradingview.com

We are weighing the risk from a trading perspective. It is the same approach that motivated the November article because we saw an attractive risk and reward setup. The equation turned upside down at this point. A sustainable rally in silver will most likely swing back near to the levels that silver trades at the time of this write-up. Hence, the train will probably not leave the station without us. However, there is also a non-negligible scenario right now. Silver is heading in the wrong direction for a while. Therefore, we cashed in on the long idea on silver and turned neutral on our outlook.