It’s been a torturous 9-month stretch for investors in the silver (SLV), but periods of significant underperformance often set up the conditions for violent reversals, and this is what the bulls are finally enjoying as we begin Q4. While the S&P-500 (SPY) is up 3% for the month, silver has gained 6%, and the Silver Miners Index (SIL) is up 11%, with leaders like GoGold Resources (GLGDF) sitting just shy of new 52-week highs. Typically, a 10% rally in less than ten trading days would be a reason to take some profits into strength. However, with sentiment for silver hitting its worst levels in years last week, I see no reason to rush to take profits. Instead, I think we could be in the early innings of a multi-month rally for silver, which should translate to the significant upside for the best names in the sector. Let’s take a closer look below:

(Source: Daily Sentiment Index Data, Author’s Chart)

As the chart above shows, bullish sentiment for silver spent more than three weeks below the 25% level in September, suggesting that there were three bears for every one bull in the market. Bullish sentiment finally plunged to a reading of 10% last week, denoting a reading of nine bearish market participants for everyone that was bullish, and these extreme readings often become at the tail end of bear markets. While nothing is guaranteed, extended periods of pessimism have typically preceded multi-month 20% plus rallies in the silver price, with any pullbacks providing buying opportunities. So, while some investors that bought the dip might be anxious to take profits into strength, I believe the best silver miners are heading much higher from here over the next six months. This is because silver is nowhere near a sell signal, and the earliest we could get a sell signal for silver would be January, based on how depressed the readings have been over the past nine months. For reference, the last time market participants were this bearish was in September 2018; silver gained 22% over the next 12 months, while the Silver Miners Index enjoyed a 40% plus rally.

One cause for concern over the past few weeks was the gold/silver ratio, which continued to trend higher, and it’s never ideal to see the gold price leading the silver price. In fact, outperformance in gold vs. silver can be a sign of late-stage bull market action and the possibility that we’ve already seen a peak in precious metals prices. However, silver’s significant outperformance over the past week is beginning to reverse this trend at a pivotal juncture. This is encouraging news for the bulls, with the silver/gold ratio finding support at its long-term moving average (white line) as shown in the chart below. Obviously, silver could break down below this moving average, and one week does not make a change in trend. However, with the bulls playing defense in an area where support was to be expected, it’s best to give the benefit of the doubt to the bulls here.

(Source: TC2000.com)

Finally, if we look at the technical picture, we can see that while the correction since February has been violent, with the metal declining by nearly 30%, it has done nothing to harm the bigger picture. This is expected silver has held its prior breakout level at $21.40/oz to $22.00/oz, and the pullback to this area was bought up almost immediately. For the time being, this suggests that we’ve merely seen a shake-out in this 5+ year base-on-base pattern, with silver remaining on a bullish reading on its quarterly and yearly chart. While silver has still not reclaimed key resistance and gotten back above $26.00/oz, as long as we continue to see monthly closes above $22.00/oz, I see no reason to lose sight of the big picture here, which is targeting a move above $30.00/oz within 18 months.

(Source: TC2000.com)

So, what’s the best course of action?

While 80% of silver miners are in intermediate downtrends and have slid below their 150-day moving averages, GoGold was one of the only silver miners that held up well and continued to build a large base between June and October. Currently, the stock is sitting just shy of new 52-week highs, suggesting that it’s clearly the leader in the space. This is backed up by the fundamentals, with the stock getting set to report a new resource of 140MM silver-equivalent ounces [SEOs] before Q1 of next year, which could translate to a re-rating in the stock. So, given the stock’s exceptional relative strength and solid fundamental story, I continue to see this name as the best way to play the silver market, with pullbacks below US$2.80 providing low-risk buying opportunities. If I were looking to play the silver space, the metal continues to trade in a range of $21.50/oz to $25.00/oz, and I would view any retracements below $22.35/oz as low-risk buying opportunities.

(Source: TC2000.com)

Disclosure: I am long GLD, GLGDF

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

SLV shares were trading at $21.60 per share on Friday afternoon, down $0.20 (-0.92%). Year-to-date, SLV has declined -12.09%, versus a 20.44% rise in the benchmark S&P 500 index during the same period.

Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles.

More...