Silver Price Prediction: Rally Halts at August High

Silver Price Outlook:

• Silver prices staged a significant bullish reversal this week.
• The break in the rally to the August high and the Fibonacci retracement cluster may be temporary, but there are bigger hurdles ahead.
• RRecent changes in sentiment suggest that silver prices have a bearish bias.

wait for a break

The surge in US stocks, US Treasuries, commodities, cryptocurrencies and the fall of the US dollar (via the DXY index) are all rooted in the same speculative impulse: which the Federal Reserve will soon signal that it intends to slow the pace of its rate hikes, culminating in a “pause” in early 2023. The fall in US real yields in recent days has been the ground zero of this speculative impulse, which has driven performance impressive performance of precious metals, and in particular silver prices, at the beginning of October.

Of course, no Fed policymaker has actually argued for a pause, and US inflation data hasn’t been reported significantly enough to really justify the jubilant narrative that the end of the bullish cycle Fed rate is approaching. So, while the rally in the price of silver at the start of 4Q’22 was remarkable – truly significant on a technical level – it is reasonable to throw some scatter on the notion of a sustained rally going forward.

Silver Price and Inverse Volatility Relationship

Both gold and silver are precious metals that generally enjoy safe-haven appeal during times of financial market uncertainty. While other asset classes dislike increased volatility (signalling greater uncertainty around cash flow, dividends, coupon payments, etc.), precious metals tend to benefit from periods of higher volatility, as uncertainty increases the attractiveness of silver as a safe haven. However, this may not be one of those times: the reduced volatility in the US stock market is linked to the belief that the Fed will not raise rates as aggressively in the future, which is beneficial for silver prices.

VIX (US S&P 500 VOLATILITY) vs Silver Price

US stock market volatility (as measured by the S&P 500 US Volatility Index, VIX, which tracks stock market volatility expectations based on options on the S&P 500 Index) was trading at 29.00 at time of writing this report. The 5-day correlation between the VIX and silver prices is -0.51 and the 20-day correlation is -0.59. A week ago, on September 28, the 5-day correlation was -0.46 and the 20-day correlation was -0.40.

SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (October 2021 to October 2022) (CHART 2)

The rally in silver prices at the start of October saw precious metals trading at its highest level since late June after breaking the downtrend from the April (yearly high) and April highs. ‘august. But the rally stalled at a familiar moment: August high 20.8435; and the area around a cluster of Fibonacci levels, the 23.6% retracement of the 2011 high/2020 low range and the 50% retracement of the 2020/2021 low range between 20.6500/20 ,8888.

Despite the resistance encountered, the momentum remains bullish. Silver prices found support today at their daily 5-EMA, while the daily envelope of the 5, 8, 13, and 21-EMA remains in sequential bullish order. The daily MACD is trending higher above its signal line, while the daily slow stochastic is back in overbought territory. Should silver prices break above the zone around 20.6500/20.8888, however, another significant resistance level lies immediately above which has longer-term implications for a significant push higher. the top.

SILVER PRICE TECHNICAL ANALYSIS: WEEKLY CHART (from November 2010 to October 2022) (CHART 3)

While there is an argument to be made that the longer term outlook remains bearish, it is important to note the delineation between a longer term bullish or bearish outlook: 21.4500/21.6800. This area represents the former support (now resistance) of the multi-year sideways range carved out after the onset of the coronavirus pandemic. A return above this range would suggest that the 2022 downside breakout has failed, and therefore a more constructive outlook – through 2023 – would be appropriate.

IG CUSTOMER SENTIMENT INDEX: SILVER PRICE FORECAST (October 5, 2022) (CHART 4)

Silver: Retail trader data shows that 84.67% of traders are net long with a ratio of long to short traders of 5.52 to 1. The number of net long traders is 3.95% lower than that of yesterday and 7.32% lower than last week, while the number of net-short traders is 17.56% lower than yesterday and 14.41% lower than last week .

We generally take a contrarian view of crowd sentiment, and the fact that traders are net long suggests that silver prices may continue to decline.

Traders are sharper than yesterday and last week, and the combination of current sentiment and recent shifts gives us a bearish contrarian trading bias for stronger silver.

— Written by Christopher Vecchio, CFA, Senior Strategist