To The Moon

Following a single-day sharp reversal and plunge in silver prices, the market may be entering a new downward phase. Both gold and silver, which had been rising continuously, exhibited a bearish engulfing pattern last Friday, with silver futures plunging nearly 6%. This may indicate that relatively strong assets like silver could soon face a catch-down correction along with the cryptocurrency market. Further deterioration in news flow could trigger a sustained downward trend.

Silver has consistently been a key asset we previously recommended for attention. Unlike gold, silver does not possess a so-called safe-haven property. Historically, silver plays the role of a late-cycle catching-up asset. Once this last-to-ignite asset completes its upward movement, it often signals a broader trend change.

The daily chart reveals a recent prominent large bearish engulfing candlestick in silver, preceded by a large doji star indicating a divergence in bullish and bearish sentiment. This suggests internal division within the bullish camp after the recent rally. Although theoretically, a new historical high would imply a trend continuation upwards, the essentially sentiment-driven rally detached from fundamentals requires consistent high-level buying to sustain. The recent appearance of profit-taking suggests weakening momentum. While the weekly chart remains relatively decent, warning signals imply investors should be cautious about a potential large-scale retracement or trend reversal.

In contrast, gold has also pulled back after rising but with more limited losses. Gold inherently has lower volatility than silver and maintains some alternative bullish narratives such as safe-haven demand. However, a recent steep rise angle exceeding 75 degrees is unsustainable in the long term. Ideally, gold would undergo a corrective decline followed by a consolidation phase before starting another upward movement. At present, directly shorting gold is too risky, but given the gold-to-silver ratio has pulled back to near its historical mean, a hedged strategy of going long gold and short silver could be considered.

Importantly, if gold subsequently suffers a single-day drop exceeding 5%, it could signal the beginning of a more significant decline in precious metals. That would represent an opportunity to sell on rebounds.

After a recent period of disruption triggered by President Trump's "Twitter crash" in the U.S. stock indices, markets have been consolidating with a relatively neutral tone. For bears to confirm a corrective phase, the early-month lows must be breached. The direction of the correction may hinge on the upcoming APEC leaders’ summit at the end of this month or early next month. If leaders avoid engagement as suggested by Trump's rhetoric, the market will likely respond with selling pressure. Conversely, if the reality turns out that the U.S. president’s tough talk is just rhetoric, new highs in U.S. indices may emerge, signaling a return to a slow bull market.

Regardless, U.S. equities remain the last bastion of risk assets. With crypto markets having surrendered and precious metals showing softness, any weakness in U.S. stocks would necessitate increasing cash allocations as a defensive move.

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