Silver Price Outlook:
- Silver prices are holding onto a multi-month descending trendline ahead of the September Fed meeting tomorrow.
- A move above the trendline increases the likelihood of a return to the September high, while a drop will raise the possibility of a return to the yearly low.
- Recent changes in sentiment suggest that silver prices have a mixed bias.
Waiting on Powell
Like most other assets this week, silver prices have seen subdued price action in the run-up to the September Fed meeting. Questions remain over whether or not Fed Chair Jerome Powell and the FOMC will deliver a 75-bps or a 100-bps rate hike, though both scenarios will likely catalyze a significant market reaction in their wake. If the Fed only delivers 75-bps, then there is a chance for a short-term recovery by silver prices; if the Fed delivers 100-bps, then silver prices could quickly slump. Either way, silver prices are clinging to a multi-month descending trendline ahead of the September Fed meeting, and the resolution around this key technical area will guide trading direction for the remainder of this week.
Silver Prices and Volatility Relationship Strengthens
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. The recent increase in US stock market volatility may be helping silver prices ward off a more significant decline in the near-term.
VIX (US S&P 500 VOLATILITY) versus Silver Price TECHNICAL ANALYSIS: DAILY PRICE CHART (September 2021 to September 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 26.51 at the time this report was written. The 5-day correlation between the VIX and silver prices is +0.50 and the 20-day correlation is +0.30. One week ago, on September 13, the 5-day correlation was -0.45 and the 20-day correlation was -0.05.
SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (September 2021 to September 2022) (CHART 2)
After setting a fresh yearly low at 17.5590 on the first day of September, silver prices have rebounded quickly to the descending trendline from the April and August swing highs. Clinging to the downtrend over the past week, silver prices are still below a cluster of important Fibonacci levels – the 23.6% retracement of the 2011 high/2020 low range; and the 50% retracement of the 2020 low/2021 high range – while holding above the 61.8% retracement of the 2020 low/2021 high range.
Momentum has improved in recent days. Silver prices are above their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD is nearing a bullish crossover through its signal line, while daily Slow Stochastics are holding just beneath overbought territory. A rally after the September Fed meeting could see silver prices return to their monthly high at 20.0140; weakness in the FOMC’s wake could produce a drop below the multi-month descending trendline, paving the path for a return to the yearly low at 17.5590.
SILVER PRICE TECHNICAL ANALYSIS: WEEKLY CHART (November 2010 to September 2022) (CHART 3)
Despite the recent rebound, there is an argument to be made that the longer-term outlook remains bearish. With silver prices having broken the 61.8% Fibonacci retracement of the 2020 low/2021 high range at 18.7064, it remains the case that the bull run in 2020 and 2021 is finished. Silver prices are still below their weekly 4-, 8-, and 13-EMAs, and the EMA envelope is aligned in bearish sequential order. Weekly MACD has only just started to trend higher but remains below its signal line, while weekly Slow Stochastics are still below their median line. From the weekly perspective, as it stands now, silver prices remain in a ‘sell the rally’ mode.
IG CLIENT SENTIMENT INDEX: SILVER PRICE FORECAST (September 20, 2022) (CHART 4)
Silver: Retail trader data shows 84.74% of traders are net-long with the ratio of traders long to short at 5.55 to 1. The number of traders net-long is 1.00% higher than yesterday and 5.50% lower from last week, while the number of traders net-short is 0.91% lower than yesterday and 64.00% 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.
Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed Silver trading bias.
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--- Written by Christopher Vecchio, CFA, Senior Strategist
