Will the rally in silver continue?

Gold’s (NYSE:GLD) incredible run since the June lows came without the accompaniment of its industrial brother silver (NYSE:SLV), but this has changed in a big way the past two weeks. Silver has climbed 10% in just eight trading days, and sentiment has gone through the roof. So much so, that Rich Dad, Poor Dad author, Robert Kiyosaki has come out this week suggesting it’s time to back up the truck on the metal. Kiyosaki has been an excellent fade for investors over the past few years, notably pulling all of his money out of the market and calling for a crash just over a month after the 2016 stock market bottom.  The S&P-500 (SPY) went on to gain 40% over the next two years and has never come close to returning to these lows. Both his recent call to back up the truck on silver and the extreme readings of 91% bulls we’re seeing in silver sentiment this week are contrarian indicators arriving in unison. Based on this, I believe this is a terrible time to be backing up the truck on silver, and instead believe buying the dip would be a much wiser move.

Looking at the below chart I’ve built, we can see that bullish sentiment for silver shown in blue finished yesterday at 91% bulls, after four out of five days closing above the 90% level. The sentiment moving average for silver is also above 90% bulls, suggesting that there are nine bulls for every one bear in silver over the past week. This is a significant level of exuberance, and typically this leads to short-term corrections at a minimum. While everyone was out of the water in late May while we sat at 16% bulls for silver, we now have everyone back in the water suddenly, and crowded trades rarely do well short-term.

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

 

As an example from a similar scenario, the below chart I’ve built shows DSI data for the March through July period in 2016. As we can see, both silver and the sentiment moving average rallied above the 90% level and stayed there for a week, and this ended up being the high for the year for silver. While I am less inclined to believe we are going to see a 20% correction as we got in 2016, I would be very surprised if we didn’t see at least some short-term weakness and a correction of 3-5% short-term.

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

 

For reference, the below chart shows the reading of 97% bulls for silver in July 2016, and how the metal performed afterwards. It was about the worst possible time to back up the truck.

(Source: TC2000.com)

So how does silver look technically?

(Source: TC2000.com)

Silver is attempting to break out above crucial resistance this week at $16.25/oz, and a weekly close above $16.25/oz would be a bullish development medium-term. However, the downtrend line from the past two years comes in just overhead, and I would be surprised if this broke with sentiment at such exuberant levels. When the majority of people have already bought, one can infer that it will likely be challenging to generate enough new buying power to break through a critical level like this two-year downtrend line.