Silver Price Outlook:
- A bear flag in silver prices may be forming around the 61.8% Fibonacci retracement of the 2020 low/2021 high range.
- A move above the daily 8-EMA – which hasn’t happened since June 21 – would suggest that a more significant rebound is taking place.
- However, recent changes in sentiment suggest that silver prices have a bearish bias in the near-term.
Recession, Real Yields, and the US Dollar
Global recession concerns aren’t going anywhere, nor is the torrent of rate hikes levied by major central banks to combat multi-decade highs in inflation rates in developed economies. But the past week has produced modest US Dollar (via the DXY Index) weakness, and US real yields have stopped climbing for the time being. The net-result has been a period of relative calm for silver prices, which just last week fell to a fresh yearly low. While the worst may not be over for silver prices, it would be foolish to dismiss the potential for a minor recovery before more selling takes place.
Silver Prices and Volatility Relationship Still Weak
Both gold and silver are precious metals that typically enjoy a safe haven appeal during times of uncertainty in financial markets. 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 silver’s safe haven appeal. A lackluster volatility environment in US equities isn’t doing much for silver prices in the near-term.
VIX (US S&P 500 VOLATILITY) versus Silver Price TECHNICAL ANALYSIS: DAILY PRICE CHART (July 2021 to July 2022) (CHART 1)
US stock market volatility (as measured by the US S&P 500 volatility index, VIX, which tracks the stock market's expectation of volatility based on S&P 500 index options) was trading at 23.30 at the time this report was written. The 5-day correlation between the VIX and silver prices is 0.00 and the 20-day correlation is -0.18. One week ago, on July 14, the 5-day correlation was -0.84 and the 20-day correlation was -0.19.
SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (July 2021 to July 2022) (CHART 2)
After setting a fresh 2022 low one week ago, silver prices have largely traded sideways, neither making a significant effort lower nor truly staging a rebound. It’s possible that a bear flag is forming around the 61.8% Fibonacci retracement of the 2020 low/2021 high range at 18.7064. Silver prices remain contained below their daily 5-, 8-, 13-, and 21-EMA envelope, which remains in bearish sequential order. Both daily MACD and daily Slow Stochastics have started to rise, but remain well-below their respective median lines. A close above the daily 8-EMA – which hasn’t happened since June 21 – would be the first sign that a more significant rebound is taking place. A drop below last week’s low of 18.1423 would kickstart the next leg lower.
SILVER PRICE TECHNICAL ANALYSIS: WEEKLY CHART (November 2010 to July 2022) (CHART 3)
The longer-term outlook remains bearish, even if a short-term rebound transpires. “Having broken the 61.8% Fibonacci retracement of the 2020 low/2021 high range at 18.7064, a more significant reversal may still transpire yet. The next level lower would the 76.4% Fibonacci retracement at 16.0061. Silver prices are below their weekly 4-, 8-, and 13-EMAs, and the EMA envelope is aligned in bearish sequential order. Weekly MACD is trending lower below its signal line, while weekly Slow Stochastics remain in oversold territory. It holds that confidence remains high in the idea that the path of least resistance is lower.”
IG CLIENT SENTIMENT INDEX: SILVER PRICE FORECAST (July 21, 2022) (CHART 4)
Silver: Retail trader data shows 93.30% of traders are net-long with the ratio of traders long to short at 13.92 to 1. The number of traders net-long is 1.20% higher than yesterday and 4.44% higher from last week, while the number of traders net-short is unchanged than yesterday and 69.92% 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.
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--- Written by Christopher Vecchio, CFA, Senior Strategist
