SILVER TODAY – Stabilises before next move

Short Term: Medium Term: Long Term: Resistances: R1 18.54 20 DMA R2 18.83 100 DMA R3 21.13 2016 high (July) R4 20.00 Key level R5 22.18 2014 high (February) Support: 50 18.99 200 17.24 20 18.54 100 18.83 Support: S1 17.24 200 DMA S2 16.47 Lower band of the ascending channel S3 15.00 Key support S4 13.64 2015 low Stochastics: Legend: DMA = Daily moving average. DMAs often correspond to support or resistance levels. Their slope is also important because it shows if the market can be supported on the upside (rising) or pressured on the downside (falling). MMA = Monthly moving average. UTL = Uptrend line The momentum index allows us to determine whether momentum is positive or negative. We use a parameter equal to 10, corresponding to momentum over the past 10 days. Above 0, momentum is positive; below 0, momentum is negative. ADX – average directional index. This allows us to gauge the strength of the current trend (above 20, the trend is strong; below 20, the trend is weak). The combination of momentum and ADX allows us to determine the current trend (up or down) and its strength (strong or weak). Technical Comment Momentum is negative and ADX is now above 20, indicative of a potentially strong downtrend. Analysis Silver continues to stabilise after finding some support at its long-term 200 DMA, which suggests the uptrend since late last year is set to continue. Still, the technical environment remains challenging: the 20, 50, and 100 DMAs are sloping downward so they could exert additional selling pressure over the next month or so.  On the upside, silver needs to move back above its 20 DMA to shore up sentiment. On the downside, we will now pay close attention to the 200 DMA, a break of which could severely damage the medium-term technical outlook.  Macro drivers Silver has been in a tight range alongside gold since the start of the week after a significant 8% drop last week due to renewed Fed hawkishness, higher US bond yields, a stronger dollar and a notable reduction in risk appetite. The stabilisation is surprising in that dollar strength, rising US bond yields continue to play out. A few reasons could explain the recent quiet trading conditions: Silver tends to be highly correlated with gold; a quiet gold market would be sufficient to reduce volatility in silver. Last week’s overreaction of traders to Fed hawkishness probably reflected forced selling due to a cascade of stop-losses being triggered. Investors have become less leveraged and are therefore more inclined to tread carefully. The sharp fall in silver prices is probably inducing some tactical buying this week, especially in Asia where buying is picking up and stocks are believed to be low. Key Fed members, including chair Janet Yellen and Boston Fed president Rosenberg, are due to speak later today. This could shed more light on the timing of the next rate increase, which in turn could induce some volatility in precious metals through a reaction in spec/investor positioning. On the supply side, mine production may tighten this year because output cuts and closures at zinc and lead mines may hit by-product output of silver. Speculative and investment flows: Speculators shortened their net long position for the first time in three weeks over September 27-October 4. As we wrote in our latest COT report, we do not think a reversal of sentiment has emerged yet. In fact, given our view that the Fed is likely to remain behind the curve for some time, net speculative long positions are likely to rise in the coming months. ETF demand for silver continues to weaken, albeit marginally. ETF investors have sold another 19 tonnes since Monday after liquidating nearly 30 tonnes last week. ETF investors are therefore net sellers of 51 tonnes in silver this month, in contrast with net buying of 156 tonnes in September. Further outflows might point to a negative change in investor behaviour. Conclusion We are now neutral on silver in the very near term, holding the view that selling pressure triggered by a repricing of Fed tightening expectations is now overdone. We have a constructive view on silver in the short term because we expect US real interest rates to remain in a downtrend due to a patient Fed, which should support strong silver pricing. A gradual rise above its 200 DMA would boost our constructive conviction. But a firm break below the 200 DMA would force us to go with the flow and adopt a negative very-near-term stance, expecting a cascade of speculative selling to ensue amid deteriorating technical conditions. All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.

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