Silver Moves Up On Short Squeeze
This article was submitted by Joel Bauman, SchiffGold Precious Metals Specialist. Any views expressed are his own and do not necessarily reflect the views of Peter Schiff or SchiffGold.
Today marks silver’s ninth consecutive week of higher nominal prices. Short coverings from yesterday’s rally is the reason behind silver’s higher price today. Commodity traders have been looking at the chart below and deeming silver as overbought. This is seen in the large short interest for silver, meaning traders are betting against silver’s price by shorting the market. Across silver futures, ETF’s, and OTC markets, there has been an increase in short positions.
As silver’s price broke the $18.00 – $18.15 resistance level yesterday, short traders scrambled to cover their positions. They do this to stop their financial loss. Covering a short is equivalent to buying. When enough traders cover their shorts the market experiences a short squeeze and the market price increases. In turn, other traders who are short get pinched our squeezed out of their positions causing a positive feedback loop of perpetual buying.
Based on today’s intraday price action silver formed a new resistance level in the $18.40 – $18.50 zone.
What’s next for silver?
Even though bearish traders have been getting defeated these last few weeks, this doesn’t mean they won’t come back for more. I anticipate high volatility in silver for the next few weeks, as the battle continues between the bulls (longs) and bears (shorts).
The level to watch for silver is $18.50. If silver can close above this level I believe prices will rally smoothly up to $19.00 or higher.
Proceed with caution, as silver can quickly give in if we see aggressive selling caused by a combination of shorts and profit takers. If this occurs the sell-off may be quick and aggressive, comparable to what we’ve seen lately (see sell-offs on 12/15/16, 11/11/16, and 10/4/16).
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