Silver Approaching Pivotal Support Level

It’s been a rollercoaster ride to start 2021 for the Silver Miners Index (SIL), with the index beginning the year with a 9% return, only to see this turn into a (-) 9% year-to-date return a week later. This disappointing reversal has occurred due to a massive U-turn in metals prices, with the silver price (SLV) sliding 12% in two weeks just as many were proclaiming the metal was on its way above $30.00/oz.

Fortunately, while this has been a very nasty reversal, we haven’t seen any significant technical damage to the index just yet. This is because the Silver Miners Index remains above its key support level at $39.80, which is the key to the bulls remaining in control of the bigger picture. Let’s take a closer look below:

(Source: TC2000.com)

While the incredible start to 2021 for the Silver Miners Index was certainly exciting, it was quite short-lived, with the ETF running into sell signals near $50.00 per share, just shy of a strong resistance level. A normal correction of 5-10% from this level would not have been alarming at all and would have suggested we were seeing accumulation.

Unfortunately, we’ve seen a nearly 20% correction instead in less than ten trading days, which is a bit of a red flag if we can’t see these losses recovered soon.

While this doesn’t mean that the index has to continue lower, the bulls must start to play some defense here. This is because the index is now coming into a key support level at $39.80 weekly, and a drop below this area would be a negative development for the medium-term picture (3-6 months).

(Source: TC2000.com)

If we take a closer look at the chart above, we can see that if the $39.80 level is broken for SIL, the ETF does not have any meaningful support until 15% lower at the $33.25 level. For this reason, the bulls are going to need to start playing defense soon to prevent the possibility of a much deeper correction. As it stands, we have strong support at $39.80 but very strong resistance at $50.35.

Therefore, I see the best course of action as starting positions in the best silver miners close to the key support area, with two of the better miners being Pan American Silver (PAAS) and Wheaton Precious Metals (WPM).

So, what way is this range likely to break?

(Source: TC2000.com)

Given the fact that the Silver Miners Index just broke out of a massive yearly base in August of last year, I believe that the index is likely to break out to the upside, given that it’s best to give the benefit of the doubt to the larger time-frame.

However, with the violent correction we’ve seen, I don’t see any reason to be aggressively positioning just yet, until we have concrete proof that the bulls are defending the $39.80 support level. Going forward, I would view any dips below $39.80 as low-risk buying opportunities. However, I see no reason to get aggressive until the market can clear the $50.35 resistance level on heavy volume. For now, I am long only two silver miners, Wheaton Precious Metals and GoGold Resources (GLGDF), but I may look to go long PAAS if this correct deepens.

While the bulls remain in control and have the benefit of the doubt, we are going to want to see $39.80 defended at all costs. 

Disclosure: I am long GLD, WPM

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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SLV shares were trading at $23.28 per share on Tuesday morning, up $0.33 (+1.44%). Year-to-date, SLV has declined -5.25%, versus a 0.92% rise in the benchmark S&P 500 index during the same period.

Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles.

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