During February, silver has been recouping some of the losses it experienced during January, when precious metals along with a broader array of assets all dropped after the US Federal Reserve suddenly took a more hawkish tilt, announcing it was raising interest rates sooner than some investors expected.
This tightening will reduce liquidity in the money supply, thereby increasing dollar demand. And rising interest rates will provide higher payouts for dollar holders.
A positive trajectory for the greenback is expected to come at the expense of precious metals, which provide no yield. The negative correlation between the dollar and silver has been obvious since the near-20% drop for the commodity after its May highs—the same period during which the dollar bottomed as silver peaked; the USD is now 6.6% higher.
Of course, markets aren't really as simple as that, with one asset rising as a mirror asset falls. Silver is also driven by the economic cycle, which is currently accelerating.
Moreover, given the myriad industrial applications for the white metal—including as an alloy for brazing and soldering, as a component of photovoltaic and conventional batteries and as an element in semiconductor manufacturing—the price of silver is also propelled by an array of business concerns.
As such, there's no magic formula for how to determine which way the commodity will go next. The supply and demand trajectory on the technical chart might help.
Silver is rising for a second week, bouncing off the bottom of its second consecutive symmetrical triangle. While the first larger one serves as a reversal pattern, if a downside breakout occurs, that would render it a continuation pattern variation.
In fact, the triangle is completed with a downside breakout. Even if the pattern continues lower, the price could first test the triangle's top, not to mention the top of the falling channel above it.
A symmetrical triangle is a pattern that signals both bulls and bears are equally determined. However, in the end, one side overcomes the other, as expressed by the direction of the breakout. That move often encourages additional decisive action from the winning side while providing a clear reversal for the other side.
Trading Strategies
Conservative traders should wait for the price to return to the falling channel top for a long, or break through the bottom before considering a short.
Moderate traders would wait for a downside breakout to filter out a bear trap with at least a 2% penetration over two days before going short.
Aggressive traders could go short on a downside breakout or a return to the triangle top, resisted by the 50 WMA. Money management will play a major role in one's overall success. Here are the basic elements of a sound plan:
Trade Sample
- Entry: $24.000
- Stop-Loss: $24.500
- Risk: $0.50 per troy ounce (multiplied by 5,000 per CME contract)
- Target: $22.000
- Reward: $2 per troy ounce (multiplied by 5,000 per CME contract)
- Risk-Reward Ratio: 1:4