It’s been a frustrating month for investors in the silver market as we saw the commodity plunge 20% just as all of the metals bugs were busy hiking their year-end forecasts to $50.00/oz silver.
While many of these price targets could be achievable long-term for the metal, the last time you want to see these targets is after a parabolic rally, as it typically suggests that everyone is now wildly bullish on the metal. This was confirmed by the fact that silver went onto a sentiment sell signal in early August, and it remains on a sell signal as of Wednesday’s close.
Fortunately, the good news is that the silver to gold ratio remains on a bullish stance, and silver looks to be consolidating above its recent multi-year breakout, a completely normal reaction after a parabolic rally. Let’s take a closer look below:
(Source: Daily Sentiment Index Data, Author’s Chart)
One of the reasons I’ve been neutral to bearish on SLV since early August has been sentiment, as sentiment ultimately rules in the short-term when it comes to markets.
As we entered the month of August, we had several days with bullish sentiment sitting above 95% bulls, and we had the long-term moving average for bullish sentiment entering the danger zone (red box) above. While we remain in this danger zone as of Wednesday’s close, we are trending in the right direction, with silver sentiment dropping to 60% bulls last week.
While this does not suggest a low is in, it is a step in the right direction. Preferably I would like to see silver sentiment fall beneath 40% for a day or two to suggest that speculators are capitulating and giving up their positions, but this is a step in the right direction for the time being.