Silver Prices Fall Back to Key Trend Support - Next Levels for XAG/USD
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.
Silver Prices Struggled in November, Soft Start to December
Silver prices just endured their second-worst month of the year, losing -6.05%, with only September’s -7.37% coming in worse. Overall, November 2019 was the third-worst month for silver prices since the start of 2017. Needless to say, silver prices struggled last month, and they are entering December on weak footing.
The main themes helping drive silver prices lower need to reverse course completely if they are to prove bullish catalysts once more. The US-China trade war Phase 1 deal continues to be kicked down the road, but as long as it remains within reach, there’s little reason for the Federal Reserve’s interest rate cut pricing to rebound in a significant manner. As long as these two facts remain, it will prove a difficult environment for silver prices.
Silver Prices Sustain Relationship Silver Volatility
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 (APRIL 2016 TO DECEMBER 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 18.40, just off of its lowest level since June.
The 5-day correlation between VXSLV and silver prices is 0.10 and the 20-day correlation is 0.61. One week ago on November 25, the 5-day correlation was 0.98 and the 20-day correlation was 0.83, and one month ago on November 4, the 5-day correlation was -0.76 and the 20-day correlation was -0.18. The breakdown in the 5-day correlation can be explained away by the interference of the US Thanksgiving holiday interfering with normal market conditions.
SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (DECEMBER 2018 TO DECEMBER 2019) (CHART 2)
Silver prices have meandering sideways for the better part of the past month, following the steep drop during the first week of November. Support has been found in a familiar zone, between 16.510 and 16.736, which has been a significant area of interest since July.
Below 16.510, the path quickly becomes more treacherous for silver prices. A break below the 76.4% retracement of the 2013 high/2015 low range at 16.332 would also see silver prices fall below the descending trendline from the August 2013 and July 2016 highs.
After the holiday week, momentum in silver prices has flattened out. Silver prices’ daily 5-, 8-, 13-, and 21-EMA envelope remains in bearish sequential order, although silver prices are above the daily 5-EMA. Daily MACD is rising (albeit in bearish territory), while Slow Stochastics have just issued a sell signal at the median line.
SILVER PRICE TECHNICAL ANALYSIS: WEEKLY CHART (AUGUST 2013 TO DECEMBER 2019) (CHART 3)
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 continues to trend lower (albeit in bullish territory), while Slow Stochastics have reached oversold territory – an ominous sign.
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/2015 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 (DECEMBER 2, 2019) (Chart 4)
Silver: Retail trader data shows 90.82% of traders are net-long with the ratio of traders long to short at 9.89 to 1. The number of traders net-long is 1.64% higher than yesterday and 3.29% lower from last week, while the number of traders net-short is 5.31% higher than yesterday and 29.35% higher 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. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current Silver price trend may soon reverse higher despite the fact traders remain net-long.
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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