Silver Ready to Rally to Mid-$30s: Here's How to Trade the Potential Uptrend

Gold hit a fresh record high overnight and silver extended its rally, following its big gains from the week before. Both metals eased off their best levels by early European trade. But the significant breakout above $30 means silver could be heading much higher.

Friday’s big breakout was hardly surprising. It was building for days, and the lack of any bearish catalysts helped to tip it over the line, triggering buy stops from the bears while the bulls who were waiting for the breakout also jumped in.

Given that silver had spent more than 3.5 years in consolidation ahead of this big breakout, while gold had already been making higher highs in recent months and judging by copper's bullish breakout that took place a few months ago and is still going, I reckon silver’s breakout can be sustained.

There are solid fundamental drivers behind this rally, besides technical factors.

Why Has Silver Been Rising?

Well, various reasons, not least because traders have been selling into the dollar’s recovery attempts ever since the release of the April non-farm jobs report at the start of this month. We have seen several data releases disappoint expectations this month, suggesting that the US economic recovery is slowing, and this will help bring inflation down, reducing the need to keep monetary policy tight for an extended period of time.

The Fed’s tapering of its balance sheet runoff has been an additional bearish factor for the US dollar.

What’s more, there is a broader macro driver behind precious metals and other commodities like silver. China’s various stimulus measures have helped to bolster demand or perceived demand for commodities, while we have seen improvement in Eurozone and UK data.

Thus, the metals’ recent gains partly reflect a weaker dollar and increased odds of a rate cut by the Fed, although the bulk of its gains have been driven by inflation hedging demand and central bank purchases.

Silver Technical Analysis, Trade Ideas

Silver's big breakout from a three-and-a-half-year range is significant from a technical point of view and suggests we could eventually see the white metals rise to the measured moved target of this range at $42.60. This level is derived from the height of the long-term range, which is then added to the high point of it (i.e., $30).

Indeed, the fact that we closed above the key $30 level and by some distance on Friday, and near the week's highs, suggests that the bullish momentum could carry into the at least the early parts of this week. After all, there is little doubt that there will be many trapped bears whose stops might not have been taken out yet.

In fact, that’s precisely what happened at the Asian open overnight as precious and base metals surged higher, sending gold to a new record, before pulling back a little.

Silver’s big breakout last week means we could well see a continuation of the upward move towards the mid-$30s this week. But whether or not silver will pull back to the key former resistance level of $30 once the impact of profit-taking at overbought levels take hold, remains to be seen.

Ideally, from a bullish point of view, I wouldn't like silver to pull back to $30 in the near-term, and instead I'll favour looking for a bullish continuation/consolidation pattern instead, before the metal potentially stages another rally.

It would be best if that potential consolidation forms around current levels or slightly higher, instead of, say, the high $30s, so that it allows traders who missed out on the move to get on board while prices are still attractive. Among other patterns, these include a falling wedge, a bull flag, and various forms of triangles. Such consolidation patterns would also allow technical overbought conditions to be worked off through time than price action.

Speaking of “overbought” conditions, silver’s oscillators are starting to look stretched and will eventually need to be addressed either through price action, or more ideally, time.

Key Levels to Watch on Silver

Last week’s high at $31.60 is now among the most important short-term support levels to watch. This level was being tested at the time of writing, after the big upsurge at the Asian open was followed by some profit-taking. Below this, $31.00 could offer some support too.

However, the key level to watch is that $30 handle, which had offered resistance on multiple occasions in the previous 3 or 4 years, before last week’s breakout. If we get a retracement in silver prices in the coming days or weeks, then this level must hold to maintain the bullish trend.

On the upside, the 161.8% Fibonacci extension level of the short-term downswing from the April high ($29.80) to the early May low ($26.01) comes in around $32.13. Silver has already tested this level overnight, and went above it, before dipping on profit-taking.

Let’s see if it will also break it on a closing basis. The 200% extension of this move is at $33.58, and the 261.8% Fibonacci extension comes in at $35.91. These are my subsequent short-term bullish targets, with the above-mentioned measured move target of the range break coming in at $42.60.

Apart from these levels, keep a close eye on round handles like $33.00, $34.00 and $35.00 etc.

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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple points of view and is highly risky and therefore, any investment decision and the associated risk remains with the investor.

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