Silver stalls above $50 as reversal signal emerges

• Spot silver trades at a premium to futures, triggering arbitrage trades
• Borrowing costs spike as inventories are drained
• Indian demand rebounds, adding fuel to the rally
• Reversal signals emerge, but confirmation is still pending

Summary

Silver’s rally may have just run into trouble. After a blistering squeeze that pushed prices above $50, a reversal pattern has emerged, raising the risk of an unwind. We look at technical setups, key levels to watch, and what traders should look for next should momentum begin to shift.

Silver Squeeze Fuels Upside

The London silver market has been thrown into chaos by a brutal short squeeze, sending prices above $50 an ounce for only the second time in history. Spot rates traded at a steep premium to futures expiring in December, fuelling arbitrage trades that drained inventories and pushed borrowing rates above 100% annualised, making it prohibitively costly to stay short.

Years of supply deficits, heavy industrial use and ballooning shipments to the US have left London with its thinnest silver liquidity in decades. Bid-ask spreads have blown out as institutional market participants withdrew to the sidelines, amplifying volatility.

Indian demand has also rebounded after a strong monsoon season, lifting jewellery and investment demand in a market that accounts for about 16% of global fabrication. Combined with broader safe-haven buying on debt and currency debasement fears, the squeeze has proven powerful, sending silver up nearly 90% from the lows struck in April, including 30% over the past month.

Reversal Signal Arrives

However, after such a dramatic run-up—driven in part by forced purchases—silver is now extremely overbought on numerous timeframes, creating the risk of an abrupt reversal should falling prices force late-to-the-party bulls to cover their positions. With Tuesday’s daily candle providing a clear reversal pattern, bears have been given an invitation to heap pain on newly established longs, if they choose to accept it.

The price gapped higher on the open, soared to multi-decade highs, but then reversed sharply, closing around halfway up the body of the prior day’s candle. This formed a dark cloud cover pattern often seen around market peaks. However, while other reversal patterns like evening stars, bearish engulfers, and key reversals have proven to be decent signals for traders in recent times, dark cloud covers have been few and far between, raising questions over the reliability of the signal. Throw in the strong uptrend the price finds itself in, and the inclination is to wait and see how the price action plays out in Asia.

Silver Trade Setups

Source: TradingView

If we were to see a break and close beneath the September 18 uptrend, it would help strengthen the price signal provided on Tuesday. It’s currently found around $50, with minor support at $51 and $48.75 located either side. If the latter were to be taken out, $46 and $42.97 are the levels to watch. If we were to see a sustained break beneath the uptrend, shorts could be established beneath it with a tight stop above to protect against reversal.

However, if we were to see another failure to sustain a push below $51—as seen late Tuesday—it would open the door for long positions to be established, allowing for entry above the level with a stop beneath for protection. Tuesday’s high of $53.68 would be the logical initial target.

While RSI (14) and MACD continue to generate strong bullish signals that favour buying dips, both indicators remain overbought on the daily timeframe, emphasising the need for risk management given the elevated risk of reversal.