Silver Price Forecast: Severe Technical Damage Sustained After Uprend Break
Silver Price Forecast Overview:
- Silver prices have remained below the uptrend from the July and October swing lows, maintaining the downtrend from the September and November highs.
- Silver volatility has plunged to its lowest level since the first week of August; silver prices have reached their lowest level since mid-August. The 5-day correlation between VXSLV and silver prices is 0.56 and the 20-day correlation is 0.83.
- Recent changes in sentiment suggests that silver prices may continue to struggle through the end of the week.
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Silver Prices Have Struggled in November
The difficult environment for precious metals persists. With global macro concerns like a no deal, hard Brexit and the US-China trade war dissipating, G10 currencies’ central banks have seen their implied rate cut paths cut down significantly. Rising sovereign bond yields (in particular, US Treasury yields) hurts silver prices at their core, as environments defined by rising real yields tend to produce the worst outcomes for precious metals.
Through November to date, silver prices have erased all of their gains from October (net-change since September 30 is 0%). As silver prices may continue to struggle in the near-term, the longer-term bullish bottoming effort remains in question.
Silver Prices Tracking Silver Volatility Lower
While other asset classes don’t like increased volatility (signaling greater uncertainty around cash flows, dividends, coupon payments, etc.), precious metals tend to benefit from periods of higher volatility as uncertainty increases gold’s and silver’s safe haven appeal. The opposite can be said during periods of falling volatility: gold and silver prices tend to suffer. The latest bout of falling volatility
VXSLV (SILVER VOLATILITY) TECHNICAL ANALYSIS: DAILY PRICE CHART (JUNE 2016 TO NOVEMBER 2019) (CHART 1)
Silver volatility (as measured by the Cboe’s gold volatility ETF, VXSLV, which tracks the 1-month implied volatility of gold as derived from the SLV option chain) has started to rebound after its sharp contraction in recent weeks, having lost nearly 40% of its value since early-September. VXSLV is currently trading at 20.76, down from a yearly high of 33.30 in September, which was its highest level since January 2017.
The 5-day correlation between VXSLV and silver prices is 0.56 and the 20-day correlation is 0.83. One week ago on November 6, the 5-day correlation was 0.96 and the 20-day correlation was -0.13, and one month ago on October 6, the 5-day correlation was 0.99 and the 20-day correlation was 0.88.
SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (NOVEMBER 2018 TO NOVEMBER 2019) (CHART 2)
In our most recent silver price forecast technical analysis update on October 29, it was noted that “traders should keep an eye on the uptrend from the July and October swing lows over the coming days; failure to hold above said trend would be ominous for silver prices. Failure to gain traction on the topside bull flag breakout has been apparent, having been rejected at the 61.8% retracement of the 2013 high/2015 low range at 18.007.”
Since then, silver prices have lost the uptrend from the July and October swing lows, maintaining the downtrend from the September and November highs.
It’s now that the case that the outlook has turned bearish in the near-term. Silver prices are below the daily 5-, 8-, 13-, and 21-EMA envelope, holding below the October 1 low. Daily MACD has trended lower into bearish territory, while Slow Stochastics are holding in bearish territory. Barring a recovery above the daily 21-EMA (currently 17.416), the path of least resistance is to the downside for silver prices.
SILVER PRICE TECHNICAL ANALYSIS: WEEKLY CHART (AUGUST 2013 TO NOVEMBER 2019) (CHART 3)
In our most recent silver price forecasttechnical analysis update, it was noted that “the longer-term bullish momentum profile is weakening…tougher times may be ahead for silver prices, if not more consolidation.”
The bearish outside engulfing bar last week suggests that more weakness may be ahead: the candle is often a sign of a near-term top. The longer-term bullish momentum profile continues to weaken, as silver prices are now below their weekly 8-, 13-, and 21-EMA envelope. Weekly MACD has narrowed is now trending lower (albeit in bullish territory), while Slow Stochastics have declined below their median line.
The longer-term bottoming effort would be invalidated should silver prices would be invalidated on a move below the 76.4% retracement of the 2013 high/2017 low range at 16.332, which would result in silver prices falling below the descending trendline from the 2013 and 2016 highs.
IG Client Sentiment Index: Silver Price Forecast (NOVEMBER 13, 2019) (Chart 4)
Silver: Retail trader data shows 92.67% of traders are net-long with the ratio of traders long to short at 12.64 to 1. The number of traders net-long is 2.79% higher than yesterday and 10.81% higher from last week, while the number of traders net-short is 16.81% lower than yesterday and 17.50% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests silver prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger silver-bearish contrarian trading bias.
Read more: US Dollar Forecast: DXY Index Rally Tracks Falling Fed Rate Cut Odds
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— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail at [email protected]
Follow him on Twitter at @CVecchioFX
View our long-term forecasts with the DailyFX Trading Guides