No bubble in the money market

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The iShares Silver Trust (SLV) ETF is trading down nearly 5% in Tuesday’s pre-market, just a day after breathless media coverage said the metal will replace GameStop Corp. (GME) and AMC Entertainment Holdings, Inc. (AMC) as the new darling of the Reddit and Robinhood generation. However, the table hammering was just plain wrong, with little technical evidence of anything more than a slight uptick in January support levels.

Key points to remember

  • The silver rally looks like routine price behavior, not a market bubble.
  • The recent silver price pattern is commonly seen in instruments testing major resistance.
  • Silver and gold should move at the same pace in the coming months.

Monday marked the fourth day of a sharp rise in out-of-range support to $ 22.94, just cents above the January low of $ 22.74. The 21% rally was impressive but nothing to write home about, especially with silver reversing after posting an intraday high just 15 minutes into the session for US stocks. Those gains have now been fully wiped out, sending the silver fund back into Friday’s opening print.

advice

A bubble is an economic cycle characterized by rapid escalation in market value, especially asset prices. This rapid inflation is followed by a rapid decrease in value, or contraction, sometimes referred to as a “crash” or “bubble burst”.

Silver Trust Monthly Chart (2008 – 2021)

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The long-term chart highlights the importance of the currently traded levels, marking the split from the top of the descending triangle of 2013. Resistance at break, aligned between the Fibonacci retracements of .382 and .50, pushed back rally in August 2020, while price action in recent weeks marks a second attempt to move up that barrier. It’s not rocket science or an emerging “bubble”. Rather, this is typical behavior when a new uptrend has to break through an old resistance.

Silver Trust Daily Chart (2020 – 2021)

TradingView.com


Silver peaked last summer, along with gold, and eased into an intermediate correction that found support at the 50-day exponential moving average (EMA) in September. Price action since that time has been perfectly technical in nature, achieving a double bottom reversal and a staircase to higher ground. The wave of buying towards major resistance is often the most dynamic in this common scenario, exposing this week’s price action as perfectly normal and routine.

However, Monday’s volume was anything but normal, posting around five times the average daily volume and the highest daily total since the 2011 high. Unfortunately for the bulls, most of the volume was released during the first one. time of the session, with the massive sell-off towards the close that tipped the active positions into the red. These losses increased overnight, potentially keeping a deadweight on price action until February.

Monday’s rise also marked a failed break above the August high of $ 27.39, strengthening the range’s resistance at that level. The horizontal ups and downs over the past six months have completed the outline of a rectangular pattern, which is bullish at the end of the large uptrend from the March 11-year low. As a result, the bulls could eventually win with a breakout to the middle of the $ 30, but the crowd trading the instrument this week may be too impatient to stay that long.

Look ahead

How far could the money go in the coming months? For starters, it’s best to expect double-sided tape between $ 25 and $ 30, with downward pressure from the broken top exerting its influence. It is also unwise to expect the metal to trend up if gold has a tendency to fall due to the high correlation between the two instruments. However, that’s not always the case, as we discovered in the early 1980s when the Hunt brothers attempted to corner the global market, taking the silver to $ 50.

advice

Positive correlation is a relation between two variables in which the two variables evolve in tandem, that is to say in the same direction. A positive correlation exists when one variable decreases when the other variable decreases, or one variable increases while the other increases.

The bottom line

Silver rally is perfectly normal, except for well above average volume, and does not fulfill the characteristics of a major bubble or short squeeze.

Disclosure: The author has not held any position in the above-mentioned titles or their derivatives at the time of publication.


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