The silver futures market has been stuck between $18 and $25 since the major sell off last April. The market has clearly spent most of its time hanging out in the bottom of the range with the major low set at $18.17 last July. More recently, the market traded down to $18.72 in late December and finally last week, the silver futures market tested that low again trading down to $18.685. Typically, the market’s action since Thursday morning would suggest a dead cat bounce as the market’s lows provide a clear double or, triple bottom formation depending on how far back you look.
Technical analysis 101 dictates that, “consolidation equals continuation.” This notion reinforces the idea that the recent lows will be violated. However, deeper analysis paints a different picture. Commercial traders have been buyers below $20. Furthermore, commercial traders have been heavy buyers under $19.50 as you can see on this chart. Commercial trader defense of these lows suggests that the bounce may be more than dead cat bounce. The market’s solid reversal on Thursday and Friday clearly show strong commercial buying along with speculative short covering.
Our expectation is that the silver market may very well be putting in a meaningful low after a third test of these support levels. Given the rapid nature of the reversal, we see no reason why the market couldn’t break through the resistance just above $20 and head towards $21 per ounce based purely on the position imbalance. We see this as a speculative and trend following short trap that has now been sprung.
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