Is Silver Overbought?

Silver prices ran into resistance levels, and prices will be tested after the US released stronger than expected economic data.  Prices of the precious metal have climbed nearly 24% in August, as weaker economic data and fear over a military strike in Syria have boosted the demand for silver.  Hedge funds have decreased short positions according to the most recent report released by the CFTC.

Better than expected economic data released on Thursday created a mixed picture for precious metals traders as yield moved higher making the dollar more attractive.  A stronger dollar is generally a negative for silver prices, as the metal is viewed by many as a currency against the greenback.

According to the US Commerce Department Gross domestic product increased at a 2.5 percent annualized rate, compared to an initial estimate of 1.7 percent. Economists had forecast a 2.2 percent gain in GDP. The gain came in corporate profits as well as exports.  The GDP price deflator remained relatively tame reflecting a modest inflation environment.

In employment news, which is the gauge that is used by the Fed to determine interest rates, Jobless claims declined by 6K in the week ended Aug. 24 to 331,000 from a revised 337,000 according to the Labor Department. Analysts’ had predicted a decline to 332,000.  Next week investors will need to absorb the BLS’s non-farm payroll report which is scheduled to release on Friday September 6, 2013.

According to the latest commitment of traders report, released for the week ending August 20, 2013 hedge fund traders reduced short positions by nearly 5,600 contracts.


Silver prices are now at an inflection point that could be critical to the future direction of the precious metal.  Prices ran into resistance near the 24.80 region which coincides with the highs seen in April of 2013. Support on silver is seen near the 10-day moving average near 23.65.  A close below the 10-day moving average would likely lead to a test of the mid-August lows near 22.50.  If prices are able to recapture the 25 per ounce level, the next likely test of resistance would be 28 per ounce.

Momentum on silver prices remains strong, with the moving average convergence divergence index (MACD) printing in positive territory with an upward trajectory.  This means that the differential between the 12-day moving average and the 26-day moving average is accelerating away from the 9-day moving average of the differential (as the chart from shows).

As silver prices ran into resistance, the RSI (relative strength index) printed above the 70 overbought trigger level. The RSI also ran into resistance and has created a double top while continuing to print in overbought territory. This should be a warning signal to traders, and although prices can print in overbought territory for a while, the yellow light is flashing.

This is a guest post by Marcus Hollander.

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