Silver’s 2nd Most Oversold Reading in a Decade But Parallels of 2008 Still Suggest Caution

Silver (SLV) just completed its second major correction this year after its parabolic rise and peak in April. The second decline that occurred over the last month has led silver to shedding nearly half its value. The decline over the last six months has pushed our silver indicator to the second most oversold value in a decade. Is this a major buying opportunity or are investors now catching a falling knife? The answer to that question hinges on what the dollar (UUP) does over the next several weeks.

Silver Deeply Oversold

Given the sharp selloff in silver over the last few months it’s not surprising to see silver in oversold territory, but how oversold is it relative to prior corrections? To show how extreme silver’s recent oversold condition is, our silver risk indicator below shows that silver is at its second most oversold reading in the past decade, with 2008 the only exception. Quite the whipsaw after our indicator showed the most overbought condition in silver in April, with our silver indicator exceeding the 2004, 2006, and 2008 peaks, and then to see the second most oversold reading six months later. Given the deeply oversold condition silver finds itself in, is now a good time to take advantage of the recent price decline? Yes and no.

Source: Bloomberg

If you compare the average path of the 2004, 2006, and 2008 corrections we should be putting in the final low for silver here and we could witness a sizable Q4 advance that sees silver rally north of $45/oz. My silver correction composite below suggests silver may trade sideways into middle October as it puts in a bottom before making a sizable run heading into the end of November. That said, I would recommend against throwing caution to the wind and scooping up silver right here.

Source: Bloomberg

2008 Analog May Hold the Key

Looking at the most recent major correction in silver, the 2008 top, suggests some caution as of the three prior major corrections (04, 06, 08), the 2008 correction shows the closest resemblance to silver’s 2011 correction. As shown below, if silver continues to trace out its 2008 top, it may embark on a further correction beginning next week that could take it to the low $20/oz level heading into November.