What’s inside:

  • Surge in silver pushes momentum readings into unusually high readings
  • Momentum begets more momentum, further upside anticipated in days ahead
  • Support and resistance levels outlined

What a rally in silver yesterday, amounting to more than the follow-through trade we were looking for in such short order. Our resistance zone in the 16.70/90 vicinity was exceeded, as the metal lifted by nearly 4% once the dust settled in New York.

Momentum, when looking at the short-term rate-of-change adjusted for current volatility, registered one of the stronger readings since the spike high in 2011, even stronger than the April rally.

Our 5-day volatility-adjusted momentum (VAM) model shot to just shy of 30 (29.82 to be precise), a threshold which has only been met twelve other times since the 2011 peak. Typically, such a powerful move in a short period of time led to further upside in the near-term, abliet often in a choppy-fashion as buyers exhausted themselves.

Follow-through may only last a few days, but typically momentum led to additional gains, barring the extreme reading came at the tail-end of a long advance (blow-off top) or decline (panic low); which in this case it is not. However, after those gains were notched the trend became exhausted and turned lower. So, this is to be treated as a short-term indication of strength, and beyond a few days we may be looking to take the otherside, price action willing.

Silver Daily w/VAM

Surge in Silver Prices Pushes Momentum Readings into Rare Territory

With that in mind, we may see a minor retracement in the very short-term, but generally speaking the path of least resistance is higher looking out over the course of days. Then, we can look for a possible reversal.

On a pullback, we will be watching support in the 16.70/90 zone we had pegged previously as resistance (old resistance becomes support). It could dip below on an intra-day basis, but should hold on a daily closing basis. Being mindful of potentally choppier trading conditions, momentum shouldn't be chased. Buying dips is clearly the favored approach on this end.

The next area of resistance to watch is around the 17.30 level, where silver a few weeks before had actively traded around. Beyond there we will look to 17.55/60 and 18.

It would require a sharp reversal lower to snap the current momentum and thus generally bullish view when looking out over the coming days.

Silver 2-hr

Surge in Silver Prices Pushes Momentum Readings into Rare Territory

More broadly speaking, in prior commentary we made noted our disbelief that a strong rally could sustain itself due to market positioning, and maybe soon it won’t as we stated earlier, but until price action warrants a bearish bias we will run with what is right in front of us.

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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.