Silver: Fed Will Write the Next Chapter

Since peaking around 21.60 in early July, Silver has sold off consistently for the past two months. By last week, the gray metal had drifted all the way down to test the critical support zone around 18.25-50; this level represents the 4-year low in silver and has provided meaningful support on three separate occasions over the last 14 months (for more on this area, see my colleague Fawad Razaqzada’s note from last week, “Can Silver Defend $19 Again?”). Now, metal traders are wondering, “will this level finally break, or is another rally to above $20 in the cards?”

As we go to press, the short-term technical picture favors the bears. As the 4hr chart below shows, silver has been in a bearish channel for over two weeks now. Just this morning, the metal peeked out above the channel, but was quickly rejected back lower, creating a large Bearish Pin Candle,* or inverted hammer pattern. This candlestick formation shows a sharp shift from buying to selling pressure and is often seen at near-term tops in the market. With the RSI still well within bearish territory, the sellers could look to drive the metal back into the key 18.25-50 support area later this week. Only a break above today’s high at 18.85 would shift the near-term bias to the topside for another run back toward $20.

Meanwhile, the fundamental side of the ledger is a bit murkier. With a plethora of high-impact economic data scheduled for the last 72 hours of the week, volatility will likely be elevated for all trading instruments. While both Scotland’s independence referendum and the ECB TLRTO auction will be important, the marquee event for silver will be tomorrow’s Fed decision and statement.

Another $10B taper of the QE program is all-but-inevitable, so the key variable will be whether the central bank tweaks its statement to suggest that it may raise interest rates sooner. We’ll have a full Fed preview out later today, but if the Fed statement suggests earlier rate hikes are possible, the dollar may rally and silver could fall back into 18.25-50 support. On the other hand, a status-quo statement and press conference would disappoint dollar bulls, likely leading silver to break out of its bearish channel and target $19 in the short-term and potentially the $20 level in time.

*A Bearish Pin (Pinnochio) candle, or inverted hammer, is formed when prices rally within the candle before sellers step in and push prices back down to close near the open. It suggests the potential for a bearish continuation if the low of the candle is broken.