No Bubble in the Silver Market
The iShares Silver Trust ETF (SLV) is trading lower by nearly 5% in Tuesday's pre-market, just one day after breathless media coverage declared the metal would replace GameStop Corp. (GME) and AMC Entertainment Holdings, Inc. (AMC) as the new darling of the Reddit and Robinhood generation. However, the table pounding was just plain wrong, with little technical evidence of anything more than a healthy uptick off January support levels.
- The silver rally looks like routine price behavior, not a market bubble.
- Silver's recent price pattern is commonly seen in instruments testing major resistance.
- Silver and gold are likely to move in lockstep in coming months.
Monday marked the fourth day of a strong uptick off range support at $22.94, just a few cents above the January low at $22.74. The 21% rally was impressive but nothing to write home about, especially with silver reversing after posting an intraday high just 15 minutes into the U.S. equity session. Those gains have now been fully repealed, dumping the silver fund back into Friday's opening print.
A bubble is an economic cycle that is characterized by the rapid escalation of market value, particularly in the price of assets. This fast inflation is followed by a quick decrease in value, or a contraction, that is sometimes referred to as a "crash" or a "bubble burst."
Silver Trust Monthly Chart (2008 – 2021)
The long-term chart highlights the importance of currently traded levels, marking the breakdown from the 2013 descending triangle top. Breakdown resistance, aligned between the .382 and .50 selloff Fibonacci retracements, repelled the rally into August 2020, while price action in recent weeks marks a second attempt to mount that barrier. This isn't rocket science or an emerging "bubble." Rather, it is typical behavior when a new uptrend has to slog through old resistance.
Silver Trust Daily Chart (2020 – 2021)
Silver topped out last summer, at the same time as gold, and eased into an intermediate correction that found support at the 50-day exponential moving average (EMA) in September. Price action since that time has been perfectly technical in nature, completing a double bottom reversal and stair-stepping to higher ground. The buying wave into major resistance is often the most dynamic in this common scenario, exposing this week's price action as perfectly normal and routine.
However, Monday volume was anything but normal, posting about five times average daily volume and the highest single-day total since the 2011 top. Unfortunately for bulls, most of the volume was posted in the first hour of the session, with the selloff into the close dumping active positions into the red. Those losses have grown larger overnight, potentially keeping a dead weight on price action through February.
Monday's uptick also marked a failed breakout above the August high at $27.39, reinforcing range resistance at that level. Horizontal highs and lows in the past six months have completed the outline of a rectangle pattern, which is bullish at the tail end of the big uptrend off March's 11-year low. As a result, bulls could ultimately prevail with a breakout into the mid-$30s, but the crowd trading the instrument this week may be too impatient to stick around that long.
How high could silver go in coming months? For starters, it is best to expect a two-sided tape between $25 and $30, with downward pressure from the broken top exerting its influence. It is also unwise to expect the metal to trend higher if gold trends lower due to high correlation between the two instruments. However, that isn't always the case, as we discovered in the early 1980s when the Hunt brothers tried to corner the world market, lifting silver to $50.
Positive correlation is a relationship between two variables in which both variables move in tandem – that is, in the same direction. A positive correlation exists when one variable decreases as the other variable decreases, or one variable increases while the other increases.
The Bottom Line
The silver rally is perfectly normal, except for much higher than average volume, and does not fulfill the characteristics of a bubble or major short squeeze.
Disclosure: The author held no positions in the aforementioned securities or their derivatives at the time of publication.
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