Silver: temporary respite or start of a recovery?

Given the strong recovery in the stock markets and the firmer dollar, precious metals are holding up remarkably well today. Yesterday we looked at gold, which was chipping away at the key $1240/5 resistance area. Today, the yellow metal has continued to push higher and is currently holding above its 50-day moving average, which is another bullish development. Silver has risen in gold’s slipstream and is likewise not reacting negatively to the rallying stocks and US dollar. What’s even more surprising is that the large outflow from the SPDR Gold Trust yesterday has not had any major impact on the price of gold. Although the CFTC data on Friday showed bullish speculation increased on gold, net long positions on silver were actually trimmed by almost 1.8 thousand contracts in the week to 14 October. The grey precious metal, which is also an industrial material, is undoubtedly boosted, at least in part, by the latest data out of China that were released overnight. In particular it was the 8% annualised rise in industrial production that has provided the main support. This was much better than expected (7.5%) and also comfortably above August’s 6.9% reading. What’s more, growth in the world’s second largest economy slowed down less sharply than had been anticipated with the third quarter GDP falling to an annualised pace of 7.3% from 7.5%, beating expectations of 7.2%.

Silver has stabilised after reaching an exhaustion point at the start of the month: $16.75. This level marks the 161.8% Fibonacci extension of the last significant rally that took place between June and July this year i.e. from point A to B on the chart. It is thus likely that a large number of bearish speculators took profit here. What’s more, this area also roughly ties in with a long-term Fibonacci level: the 78.6% retracement of the 2008-11 bull trend, at $17.35. Given the close proximity of these key Fibonacci levels, it should come as no surprise therefore that it has found some support. Currently, the grey metal is testing one of the two bearish trends that are visible on the chart, so there is a possibility it could turn back lower from these levels. As well as the trend lines, there are numerous horizontal resistance levels that are fast approaching, the first one being at $17.80, followed by $18.20 – the 2013 low, which could now turn into resistance. The 50-day moving average, at $18.40, comes in just ahead of a major resistance area: $18.50/65. Here, the 38.2% Fibonacci retracement level of the downswing from July meets the May low point.

But above each of the resistance levels just mentioned there are likely to be clusters of stop buy orders.  If these start getting triggered, the bullish momentum would likewise increase and so prices could spike sharply higher. Still, for the bearish trend to change, we do need silver to at least break and hold above $18.50/65. If successful, a rally towards the 200-day SMA and 61.8% Fibonacci retracement level, both at $19.70, could begin.  Meanwhile a potential closing break below $16.75 could pave the way for more losses.

Figure 1:

Source: FOREX.com. Please note this product is not available to US clients.

 

Source: FOREX.com. Please note this product is not available to US clients.

Source: FOREX.com.