Silver loses steam, but bulls keep it from losing its gleam

SILVER failed to sustain the bullish momentum two weeks ago after it broke above the US$17.00 range high. The lack of bullish follow-through led to silver falling back below the US$16.00 handle once again, but the strong base of US$16.00 psychological round number stood rock-solid suggesting the bulls are still present.

After silver briefly tagged below the US$16.10 range low, relentless buying resurfaced proving the significance of the US$16.10 area. The bullish rejection makes this the fifth time silver bounced off the US$16.10 range low in the past three months suggesting the bulls stand ready to defend that level.

Looking over at the mining space, the silver miner ETF, SILJ (ETFMG Prime Junior Silver ETF) also exhibited a similar strong support in the foreground. SILJ is an exchange-traded fund that tracks a modified market-cap weighted index of small-cap silver mining and exploration companies.

To be exact, the US$10.00 psychological round number area is the point of interest for keeping the long-term uptrend intact for the junior silver miners. Moreover, the long-term 61.8 per cent Fibonacci retracement level also coincided with the US$10.00 psychological round number making this a stronger support.

From the longer-term view, it is no surprise that the US$10.00 psychological round number area kept a floor on price and prevented the SILJ from falling further.

In the past five months, the US$10.00 psychological round number has vehemently halted the selloff on two occasions in December 2017 and February 2018. As a result, SILJ rebounded +26 per cent and 20 per cent respectively over the near-term.

Closer scrutiny of the recent price action suggests a possible double bottom formation at the US$10.00 psychological round number after the sharp bullish rejection in December 2017 and February 2018. Put differently; the double-bottom formation suggests a reversal higher next for a new uptrend to take over. With the benefit of hindsight, we have seen a decent rally developing lately resulting in some bullish breakout.

On the week ended April 20, buyers succeeded in breaking above the multi-month downtrend line since February 2017 and US$11.10 range high gave us some early indication that the bulls are warming up. For the double bottom formation to be confirmed, the SILJ needs to close above US$12.43 neckline. Once that happens, the next wave of buying should begin with US$15.00 psychological round number being the price target.

With the expectations of silver holding up above the US$16.00 psychological round number, the US$10.00 psychological round number in the SILJ should hold as well leading to a reversal higher next in both asset class. Note that silver miners react positively to silver price as it affects their profitability.

Higher silver price translates into higher sales price and thus higher profit margin and earnings. In other words, the silver miners are a leverage play on silver itself. For example, the baby bull run in silver in early 2016 saw SILJ rallying for +281 per cent while silver was only up +54 per cent.

In conclusion, as long as the US$16.00 psychological round number in silver holds up, we expect limited downside in SILJ with US$10.00 psychological round number being the floor that keeps the long-term uptrend alive.

The recent bullish breakout after the ongoing double-bottom formation signals a bullish outlook with buyers expected to target the US$12.43 resistance area next, followed by US$13.81 in the near-term.

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice