Silver hits lowest since July 2010, but is the selling overdone?
London (Sept 22) Precious metals have extended their losses overnight, pressured by the lack of investment demand due to the still-buoyant equities, low and stable inflation in the major economies and of course the stronger US dollar. Although the US Federal Reserve last week reiterated that it expects rates will remain on hold for a "considerable time" after the end of QE program, FOMC members also projected a faster pace for rate hikes. This helped to boost both stocks and the dollar, a toxic mix for buck-denominated precious metals. But hopes that the lower prices may trigger some retail purchases in India ahead of the wedding season there are preventing an even larger slide. Still, until such a time that the fragile sentiment in the investment community turns positive e.g. when we see consistent inflows into gold and silver ETFs and speculators opening significant long positions, both metals are likely to remain under pressure.
On Friday, silver dropped and closed sharply below the 2013 low of $18.20. This dented the already-bearish sentiment and caused/forced more longs to abandon their positions. Price momentarily paused at the 127.2% Fibonacci extension of the last major upswing, at $17.75/80, before extending its move lower overnight (see daily chart, below). Worryingly for the bulls, the metal has also created a “death crossover” which is another bearish development. This crossover, which occurs when the 50-day moving average drops below the 200-day SMA, is seen by some (especially momentum traders) as confirmation of the downward trend and therefore reason to sell. But these moving averages are by definition lagging and price has already moved considerably lower. In fact, the daily RSI at 16 is suggesting silver is extremely oversold on this time frame. Meanwhile the weekly RSI has also reached the oversold threshold of 30. What’s more, price has now pulled back to a major Fibonacci support: the 78.6% retracement level of the upswing from the 2008 low. Thus, for all these reasons, we may see a recovery of some sort (which, in fact, may already be underway with price off its overnight lows) before another push lower. Nevertheless, the trend is clearly bearish from whatever time frame you look at it. Therefore it wouldn’t surprise me if silver were to extend its losses before even staging a minor recovery. Unless silver were to create a bullish signal (e.g. break the bearish trend and form a particular bullish-looking candle) our technical bias would remain bearish on the grey metal.