Silver has added around 26% in 2016 and the move higher in the past three weeks has increased the price from a reaction low of $14.75 to over 17% higher. The rally on silver is strong and the bulls are seemingly in control, but will it last? Is the move running out of steam?
On a technical basis, the daily chart silver is very strong. Having made a significant medium/longer term breakout last week above the resistance at $16.15, the hugely strong bull candle from Tuesday is being followed today by another prospectively strong bull candle. A test of the key resistance levels from 2015 are now well within range. This means that the May 2015 high at $17.77 and the January 2015 high at $18.48 could come under threat if this bull run continues for the coming days. Also momentum indicators are all strongly configured with the RSI at 78 and the highest since July 2014. The bulls are in control and this can mean that the RSI could sustain these levels due to this being a bullish breakout.
The long term chart would suggest that $17.80 towards $18.50 is key overhead resistance with the latter being a huge pivot line. Therefore this is a highly likely area for the next high for Silver.
All bull runs come to an end, and often the ensuing retracement can be severe as the market rushes to lock in profits. The question is one of upside potential and therefore becomes one of risk reward. The upside potential looks to be limited up here to around $17.80 to $18.50. From the current price at $17.40 that is around 2% to 6% of upside? The RSI is at 78 which is historically very stretched. A corrective move would likely gather momentum fairly quickly in the event of a confirmed topping out and this could dive a near term move back towards the breakout around $16.15 which is basically around the 50% Fibonacci retracement of the rally from $14.75 to today’s high (if that is taken to be the peak) at $17.60. This is over 7% of downside.
Looking for exhaustion signals on the daily Bollinger Bands does not give us too much… yet. However, the limits are being pushed with the price trading outside the 2.0 standard deviation upper band which is around $17.17 currently. A close back inside the bands now would begin to question the strength of the run.
The hourly chart also shows a bearish divergence formation which suggests that the impetus is beginning to wane in the move. There was a similar looking bearish divergence back on 13th April, but this was with the daily RSI at 65, now it it is up at 78 which is historically stretched on the daily chart.
I am not calling a correction in the silver chart quite yet as the bulls still remain very strong. However, the signals are beginning to rack up that suggest that upside momentum is beginning to wane after such a strong run higher. This leaves long positions at risk of profit taking which after such a sharp run higher could quickly reverse. Traders should be aware because the historic volatility in silver is high and these moves can be fast.