Is it Time to Take Profits in Silver?

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It’s been an incredible start to Q3 for silver, as the metal is up over 30% in barely 20 trading days, and this significant move in the metal has brought with it the most optimism we’ve seen in years.

While it was hard to find a $20.00/oz price target for silver during the metal’s doldrums in March, we’ve now got $30/oz and $40/oz silver targets being slapped on the metal, with many analysts looking for these price objectives to be achieved by year-end. This should be worrisome to the bulls, as the metal rarely fares well when everyone is suddenly bullish.

Unfortunately for the bulls, this extreme optimism is coupled with the most overbought reading we’ve seen in nearly a decade, with silver moving up in a parabolic fashion, with the 6-month rate of change now over 30%. Based on the complacency we’re seeing which is evidenced by panic buying, as well as an extreme overbought condition, investors would be wise to be cautious here.

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As we can see in the chart above of sentiment for silver, we’ve been on a reading of 85% to 94% bulls for nearly two weeks now, which suggests that there is a minimum of 9 bulls for every one bear in the market currently.

This has typically been a warning sign as the red shaded area shows and this is because when everyone is bullish, there’s not many left to buy to support the rally.

The last time this occurred was August of 2019 and the metal-topped shortly thereafter before falling nearly 20% in less than three months. While we don’t need to see a repeat of August 2019, we are certainly in nosebleed territory here which has typically been a good place to book at least some profits.

The one silver lining is that positioning among small speculators has not caught up to prior peaks before, and this is despite a much higher silver price ($24.00/oz vs. $19.00/oz).

While this remains a positive divergence, we are now outside of the moderate pessimism zone below 30,000 contracts. Also, this is typically a lagging indicator as it’s only reported once a week, and therefore, it’s not reflecting today’s prices, but instead last Thursday’s prices.

Therefore, while this divergence suggests we likely haven’t put in a long-term top, there’s no way to rule out a short-term top based on this indicator’s reading.

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(Source: CFTC Data, Author’s Chart)

Finally, if we take a look at the technicals below, they are corroborating the complacency we’re seeing in sentiment, as we now have one of the most overbought readings in silver we’ve seen in years.

This current overbought reading has now exceeded the overbought readings of July 2016 and August of 2019, and both of these marked major peaks. The difference this time around is that we have a multi-year breakout as a tailwind, and this is one reason why this won’t likely be a long-term top.

However, multi-year breakout or not, nothing goes up in a straight line. Therefore, some volatility here would not be surprising, nor would a…

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