Silver Recovery Should Be Treated With Caution

Silver Recovery Should Be Treated With Caution

Gold and silver prices have endured a volatile week. They were recovering from a weak start to turn positive. Unless something changes, the precious metals are on track to end higher for the week.

The S&P 500 and Europe STOXX 600 have also recovered from a sizable fall. They are higher for the second week, while the dollar index is down.

Financial markets have become very anxious about US stimulus talks. Precious metals have been unable to separate themselves from other assets. 

Precious metals gold and silver have been trending positively with equities for a while now. Since markets bottomed out in March, that relationship seems to have become stronger. 

Everyone’s focus was on the economic relief package, and trading has been all about risk-on or risk-off economic data. Rising virus cases and everything else is set aside.

President Donald Trump’s administration has shifted tack and is now again leaning toward a large-scale fiscal aid bill. On Tuesday, Trump sent the markets sharply lower after tweeting that negotiations with Democrats were to be put on hold.

That is until after the US election results, only to then float the idea of individual aid measures. However, Nancy Pelosi wasn’t up for that, and Trump seems to agree that a comprehensive stimulus package might be needed. Large differences remain between the two parties. 

Price Action

Precious metal silver has now approached a key level around $24.50 and traders should be prepared to play different scenarios. It will depend on how price action evolves.

Silver still remains inside a larger consolidation pattern and below long-term resistance circa $26.00-$28.00. Therefore, the recovery seen since the end of September has to be treated with some caution.

The bulls would argue that silver’s refusal to go down is suggests that precious metal prices should now break higher. This is because the bears might be trapped. It has almost taken out Tuesday’s high around $24.50. 

If the precious metal breaks and holds above $24.50, this could clear the way initially towards $25.00. This is followed by next potential resistance levels around $25.50 and $26.00. 

These were levels where it had previously found some support. The 61.8% Fibonacci retracement against this year’s high comes in at $26.73. 

If silver fails to hold above $24.50, after a brief break, then this could turn into a false break reversal. It could lead to a sharp move in the opposite direction.

If silver doesn’t take out $24.50 resistance, it will be an alternative bearish scenario. Or instead if it falls back sharply to take out the pivotal level of $23.60, the August low.

Price action then would show that September’s move down may have been more than just profit-taking. It could cause silver a sharp drop, towards long-term support around $20.00.

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