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What’s inside:

  • NFP miss sends silver prices sharply higher
  • Strong momentum may see follow-through in near-term, but…
  • Market positioning still suggesting caution in the intermediate-term

On Friday, the big miss in non-farm payrolls (38k; worst print since Sep ‘10) sent the US dollar lower by its largest amount in over a year. The move sparked a sharp rally in precious metals; gold ended the day advancing by 2.5% while silver prices tacked on about 2.1%.

The bounce in silver since last Wednesday has now exposed the top-side parallel of a channel dating back to the 5/2 peak. One of a couple scenarios will likely play out at this juncture. Either resistance will be honored as such and result in weakness towards trend support off the January low, or it will take out the upper parallel and open up the possibility of a larger advance to the 16.70/17 vicinity. A third possibility is we see neither and silver prices meander side-ways.

Yes, I just basically said silver could go up or down. But which direction is more probable? Let’s look at this from a short-term viewpoint then scale back a bit and look at the picture from afar.

The strong momentum we saw on Friday in the dollar and subsequently in precious metals suggests we will see follow-through in the short-term. A pullback may take shape initially off resistance, but strong surges like the one we just witnessed tend to take a little time before becoming fully exhausted. With that said, the top-side parallel looks poised to be overcome in the days ahead. If you aren’t a believer in the rally, the trend-line silver is currently trading at offers up a good spot from a risk/reward perspective to express that view.

Silver (XAGUSD) Daily

Silver Prices May Shine in Near-term, Intermediate-term Caution Still Warranted

More broadly speaking, though, the prospect of seeing a strong, sustainable move to the upside looks unlikely at this time until we see a further reduction in long holdings by speculators. We discussed this dynamic recently; where an easing in the historical net positioning in gold and silver futures markets will be needed if there is to be further price appreciation. With that said, while we may see a breakout take shape we caution on overstaying one’s welcome on long positions until a more favorable macro-backdrop in market positioning presents itself. You can read more about this here and here.

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---Written by Paul Robinson, Market Analyst

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