Silver has caught the imagination of traders and speculators this summer, but the 250% uptick since March may be coming to an end, trapping longs who are expecting the white metal to match gold's torrid 2020 performance. If so, iShares Silver Trust ETF (SLV) and the silver futures contract could sell off into the upper teens and hibernate for another decade or two before waking up from the dead once again.

Key Takeaways

  • The silver contract and fund have lifted to seven-year highs this summer.
  • The instruments have broken out above resistance at a trendline going back to 2014.
  • The rally has now reversed at the 2013 breakdown from a complex topping pattern.

The silver contract has a longstanding history of vertical buying spikes that get eventually sold aggressively, breaking their speculative bubbles. It happened in the early 1980s when the Hunt Brothers tried to corner the silver market and again at the start of the last decade when a multi-year commodity rally flamed out after posting historic highs in gold, crude oil, and other popular contracts.

Silver Relative Strength on the Decline

The 2020 uptrend has now reached resistance at a three-year descending triangle top that broke to the downside in 2013, setting off a multi-year decline that ended an 11-year low in March 2020. Silver has posted three strong rally waves since that time, reaching the underside of the broken triangle at the start of August. It's now consolidating in a symmetrical triangle while daily and weekly relative strength readings cross into sell cycles, raising the odds for a downdraft with an initial target at the 50-day exponential moving average (EMA) near $21 on the fund and $23 on the contract.

What could change this generally bearish analysis? For starters, silver could ride gold's coattails if gold breaks out above $2,000, lifting into the $30s as a first upside target. However, the gold contract may be topping out as well, in line with arguments posted in Gold May Have Topped Out After Historic Uptrend. Hedge funds loading up on silver would also have a beneficial effect, although Warren Buffet's recent gold position disclosure had little impact on the yellow metal's price.

A futures contract is a legal agreement to buy or sell a particular commodity, asset, or security at a predetermined price at a specified time in the future. Futures contracts are standardized for quality and quantity to facilitate trading on a futures exchange.

iShares Silver Trust ETF Long-Term Chart (2006)

Long-term chart showing the share price performance of the iShares Silver Trust ETF (SLV)
TradingView.com

The fund came public at $13.95 in May 2006 and topped out near $21 in the first quarter of 2008. It sold off to an all-time low in the single digits during the economic collapse and bounced strongly, stalling within two points of the prior high at the end of 2009. A May 2010 breakout attempt failed, ahead of a vertical buying impulse that posted an all-time high at $48.35, right in the vicinity of the silver contract's 1980 parabolic peak.

A 2013 descending triangle breakdown established a long-term downtrend with heavy resistance situated between $25 and $28. Keep that level in mind because the 2020 uptick reversed in that price zone about four weeks ago. Bears maintained control of the tape for years, grinding out a long series of lower highs and lower lows into the 2016 low near $13. The fund tested that level in 2018 and bounced but broke down in the first quarter's pandemic swoon.

The subsequent recovery wave mounted a six-year lower highs trendline in July, establishing an uptrend while setting off a vertical impulse that stalled at descending triangle resistance and the .386 Fibonacci selloff retracement level in early August. The fund has held short-term support into month's end, carving a symmetrical triangle that should attract buying interest, while technicals are showing a steady decline in strength that could signal an intermediate top.

A descending triangle is a bearish chart pattern used in technical analysis that is created by drawing one trendline that connects a series of lower highs and a second horizontal trendline that connects a series of lows. Oftentimes, traders watch for a move below the lower support trendline because it suggests that the downward momentum is building and a breakdown is imminent.

The Bottom Line

Silver has reversed at long-term resistance and could sell off into the fourth quarter.

Disclosure: The author held no positions in the aforementioned securities or their derivatives at the time of publication.