Volatility Could Be Brewing For Silver

With Silver prices continuing to coil, it remains touch and go as to which way it could break. But with volatility seemingly brewing around a pivotal area, when it breaks, it could be hard and fast.

Ultimately, we suspect silver’s price action is fast-approaching an inflection point. As Fawad Razaqzada noted yesterday, silver has clearly stalled around an important level on the weekly chart whilst traders decide their next move. Despite threatening to break lower on Tuesday, the bullish wedge pattern we’ve been tracking has held on by the skin of its teeth, only to see bullish momentum return and drag it from its lows. Now testing the upper trendline, a break above $15.10 would clear the trendline and break above last week’s doji high and confirm the bullish wedge.

However, a quick look at market positioning paints a bearish view. As noted in Monday’s COT report, silver’s bullish positioning is at its weakest level this year and on the verge of flipping to net-short exposure on rising volumes. Furthermore, managed funds are net-short for a second consecutive week with gross-short exposure trending higher, and there are no signs of a sentiment extreme. As we tend to assume that managed funds know what they’re doing, it suggests further downside for oil. To counter that, if prices rally and they’re caught off-guard, we’ll have some deep pockets scrambling to cover their shorts and put more fuel onto a bullish fire. This only underscores our belief that volatility is brewing whichever way it breaks.

A close either side of the $14.75 - $15.10 could be key and have ramifications for sentiment next week.

• For bullish setups: We’d like to see a clear break above $15.10, as this invalidates both the bearish trendline and last week’s high. Although, for a cleaner and more sustainable move, the US dollar’s rally must to lose some steam.
• For bearish setups: We’d prefer to see a close beneath $14.75, as this takes it comfortably back within range and confirm positioning among managed funds. Whilst within range it could favour a ‘sell the rally’ approach which it remains beneath the $14.90 highs.

For now, it’s simply a matter of watching and waiting.