Silver is hovering near 5-month highs on US dollar weakness as the white metal is negatively correlated to the greenback.
The dollar is under pressure as polls widely predicted a decisive Republican victory in the midterm elections. Such an outcome would have benefited equities at the expense of the dollar as Republicans would stop further spending and tax hikes. Conversely, the pursuit of additional exposure to equities would have resulted in the divestment of dollar positions.
But as expectations of a 'red wave' faded as it became clear that Republicans will not have as much power as anticipated, investors are repricing risk assets' increased vulnerability by rotating back into the dollar.
The Federal Reserve's persistent reiteration that it will continue to increase interest rates—even if some language has suggested a less aggressive posture—will likely support the dollar.
Now, traders turn their attention to inflation data. After signs that inflation increases were slowing, will today's US CPI allow the Fed to change lanes and slow the path to a higher interest rate?
The greenback has retreated from multi-decade highs recently on the narrative of a pivoting Fed. I think the Fed will continue to err on the side of higher interest rates as it has shown more determination in its attempt to dent inflation after erring on the side of caution last year.
Psychologically, investors may consider that the Fed might be overdoing it, but the outcry will likely be all the louder if the Fed repeats the mistake of last year when some considered it to be falling asleep at the wheel.
Last week, I put a 115 target on the dollar. After peaking above the wedge, the price returned to retest its bottom successfully.
So, let's see how all of this impacts silver.
The price found resistance where the top of a rising channel from August meets with the 200 DMA and a bearish stronghold, which we'll see in the weekly chart.
We see that, at the same time, the price found resistance by the 200 DMA, as it is trading right on the 200-week MA. We also realize that Silver retreated from under the $22 level, where the price found support from September 2020 through May 2022.
That support marked the consistent level of lows in that period. Conversely, the highs were falling from February to May 2021 to March 2022, reflecting how sellers kept compromising on their price while buyers remained steadfast, demonstrating who has the bargaining position.
By May, buyers became even more demanding, willing to buy only at lower prices. Sellers were desperate enough to lower offers below the pattern, potentially triggering a cascade of orders.
The white metal recovered on short coverings and dip buyers, triggering a return move to retest the descending triangle from September 2020 to May 2022. The price now has two technical forces to drag it down—the channel top, reinforced by the 200-day and week MAs, and the descending triangle.
Target
The descending triangle's height measures $8.44, a move technicians expect will repeat to $13.40.
Trading Strategies
Conservative traders should wait for the short-term uptrend, presented by the rising channel, to synchronize with the medium downtrend before risking a short position.
Moderate traders would wait for the price to confirm the resistance, with at least one long, red candle, closing below the 200 WMA, before considering to short.
Aggressive traders could short at will, according to their strategy, incorporating their budget and temperament, in addition to timing. Here is a generic trade plan:
Trade Sample – Aggressive Short
- Entry: $21.50
- Stop-Loss: $22.00
- Risk: $0.50
- Target: $19.00
- Reward: $2.50
- Risk-Reward Ratio: 1:5
Disclaimer: The author does not hold a position in any of the assets mentioned.