Where’s Silver Headed Next?

Silver Headed NextSilver prices have had an extraordinarily strong move over the past few weeks. With the anticipation of a new monetary stimulus plan by the Federal Reserve, many investors piled into this commodity and ran up silver prices. According to the U.S. Commodity Futures Trading Commission, bets on higher silver prices jumped almost 10 times over the last couple of months.

According to Bloomberg, hedge funds are the most bullish on silver prices than at any time over the past seven months. With more money printing, the answer, it seems, is easy and many hedge funds have piled into this commodity, hoping for higher silver prices. However, in life there are no easy answers.

This idea of everyone is piling into this space and pushing up silver prices so quickly worries me. Usually when so many people are bullish or bearish, it signifies a top or bottom. Let’s see if my technical analysis of silver prices can give us a better roadmap.

Technical analysis initially tells me that, by looking at the Relative Strength Index (RSI), the move in silver prices has become quite overbought. However, this does not mean that silver prices have to go down; in fact, technical analysis is telling me that as long as the support level of approximately $32.00 holds, we should see silver prices move up. If that support were to fail, the technical analysis of silver prices would then indicate a pullback to $30.00 and, more worrisome, a broken uptrend.

 Silver-Spot Price Chart

Chart courtesy of www.StockCharts.com

Another worry is that small retail buyers are not accumulating this commodity. The U.S. mint has sold approximately 25 million ounces of American Eagle silver coins, which is about 23% lower than the previous year. This means that the push higher in silver prices is primarily due to hedge funds. Hedge funds are very quick traders, in and out rapidly, which means that, if support is broken, there will likely be massive dump into the market as they close their trades.

Silver - Spot Price Chart

Chart courtesy of www.StockCharts.com

The longer-term view of silver prices is seen here, on a three-year weekly chart. First, the good news is that a key technical analysis level has just been broken, the piercing of the long-standing downtrend line. In this chart, my technical analysis would suggest that I would trade from the long side from $30.00 and up. A fall below $30.00 would push silver prices back below the downtrend line and cause serious trouble from a technical analysis point of view.

I have also placed the Fibonacci retracement levels on this chart. As one can see, there is a large amount of resistance for silver prices on their way back up to $40.00. I would suggest that, due to the rapid rise in silver prices, one should be patient. However, if silver prices hold current support, look for the move to continue until silver prices fail to hold one of these key support levels.