After testing support several times in June, silver soared 5% on positive news out of the EU summit. As the next quarter gets underway, there are several important things to consider.
First is that silver is deeply oversold. Looking at RSI of the SLV ETF, you'll notice that the 14-day relative strength index has been a fairly good predictor of silver's short term movements. The RSI's current value suggests that at least for the next few trading sessions, silver should see generally positive price movement.
The second key factor is the convergence of silver's nominal price support line and the long-term trend line. While silver has shown repeated ability to bounce of support, if it doesn't start moving upward, it will violate this long-term trendline which could spark a flurry of sell orders. Saxo Bank notes that put option activity suggests many traders are positioning themselves for such an event:
Silver is balancing on a knife as it is once again approaching the critical support level mentioned above with the added spice that the trend-line from the 2008 can be found within the same area.
A break below the September 2011 low at 26.07 could signal a possible extension as sell orders would flood the market and possible take it one to two dollars lower while a rejection should give it enough confidence to retrace back towards resistance at 32. With the risk however being skewed to the downside traders have been positioning themselves through the use of options with out of the money put volatility rising strongly over the last week.
Despite the bearish hedge activity, silver's technical pattern for the week is bullish. This, in addition to the RSI readings mentioned above, suggests that now might be a good time to hop on the silver train for the short term.
The recent developments in Europe can be viewed one of two ways for silver and other precious metals. The EU's promise to inject cash into banks does classify as "loose monetary policy," however, continued liquidity in Europe without concomitant QE by the Fed may lead to further strengthening of the US dollar as the "best of a bad bunch." This strengthening has historically been bad for silver (see chart).
Finally, on a bullish note for silver, the gold/silver ratio has retreated from year highs and a continued downward trend would mean higher prices for silver. From Yahoo!:
Silver was up 5.1 percent at $27.67 an ounce. That helped pull the gold/silver ratio, or the number of silver ounces needed to buy an ounce of gold, back from its highs of the year to 58.5.
This week should be friendly to silver, but watch out if silver breaks below the long-term support of the trendline. This would be a bearish indicator that could spark a further sell-off/consolidation period prior to resumption of the long-term uptrend.
I am long SLV.