Chart of the Day – Silver’s Major Reversal, $SLV

by Enis May 20, 2013 2:59 pm • Commentary

The precious metals have been getting smoked for the past 6 months.  When Sunday night futures opened in silver, the price dropped almost 10%, as sell stops were hit when it made a new low.  That initial bout of panicky selling likely marked an important short-term low in silver, as the commodity is now higher on the day, a vicious rally after such a down move.

The 6 month chart of the silver futures contract shows a few signs for optimism, despite the relentless nature of the selling in that period:

6 month RSI chart of Jul13 silver futures contract, Courtesy of Bloomberg
6 month RSI chart of Jul13 silver futures contract, Courtesy of Bloomberg

Most importantly, the futures made that brief new overnight low, but is now trading higher, indicating potential exhaustion of sellers.  The bottom panel shows that the RSI has made a positive divergence, as April’s crash lower was the stronger move, while last night’s new low was a weaker down move on a momentum basis.

On a longer-term basis, silver has bounced from an important support area.  The 6 year weekly chart shows that SLV encountered resistance around the 20 level multiple times from 2007 to 2009, before finally beginning its major move upon breaking that level:

6 year weekly chart of SLV, Courtesy of Bloomberg
6 year weekly chart of SLV, Courtesy of Bloomberg

That prior resistance at 20 is now the crucial long-term support level to watch.  Buyers have arrived near 20 twice now in the past month.  Many probably view it as good risk/reward entry on the long side given the obvious level to use as a stop.

With today’s bounce, what to make of silver here?  The 6 month chart above shows that silver still has a declining 50 day moving average, and ample overhead supply around 24.  This type of chart setup, where an important short-term bottom might have been made near long-term support, but a longer-term downtrend still in tact, usually implies near-term consolidation.  My short-term bias in silver is to the upside, but I don’t see a lot of upside.  Put it all together, and here’s my short-term forecast for SLV – rangebound price action between 21 and 25.  Nothing to get too excited about either way.