What’s inside:

  • Silver prices moving into support zone of importance
  • A meaningful bounce could develop, but…
  • It is likely to be short-lived given the extreme positioning present in the futures market

The price of silver went wild during all of April, but has been tamed considerably during the month of May, giving back more than half of those gains. The multi-week decline is bringing silver back to a key point in that April ride higher – the neckline of a broad inverse head-and-shoulders which came shy of its reaching its measured move target around the 18.40 mark.

The area surrounding 16 is an important one as it has held clear influence on the price of silver dating back to September of last year. The risk of a meaningful bounce is increasing as it enters this critical area, but the view at this time is any bounce which should unfold will not likely be sustained.

Here is why.

Market positioning in the futures market, just as it is in gold (discussed here), is highly unfavorable for a price advance until net positioning normalizes. Below, the chart shows the record net long position held by large speculators (hedge funds, trend followers), with a nearly equally impressive net short position currently held by commercial hedgers.

Silver Market Futures Positioning

Silver Prices Seek Support, Rebounds Likely to Be Short-lived and Here is Why

An unwinding of this extreme situation is set to put a damper on precious metals for the foreseeable future. This doesn’t mean the metals can’t bounce, though, it just means upside gains are expected to be unsustainable.

With that said, in the near-term a relief bounce could unfold as support takes hold. It is presently trading modestly higher at the time of this writing. If 16 is taken out, then we will watch how silver responds to the trend-line off the January lows.

Silver (XAGUSD) Daily

Silver Prices Seek Support, Rebounds Likely to Be Short-lived and Here is Why

Handling this from a trading perspective: If already floating a profit on a short-trade, buttoning up trailing stops is a prudent decision at this juncture. Initiating fresh short positions with support so close at hand presents a potentially dangerous proposition; even though positioning suggests lower prices, sharp bounces, even if short-lived, put one at risk of taking a loss before seeing further declines. Ideally, a bounce back towards the upper parallel of the channel off the May 2 peak presents trouble and offers up an entry to join the trend lower. Aggressive counter-trend traders may look to play a bounce if silver ‘acts right’ around support, but keep in mind the bounce is likely to not last. By acting right, we mean a solid probe of support followed by a sharp daily reversal.

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---Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter @PaulRobinsonFX, or email him directly at instructor@dailyfx.com.