New Delhi, April 25: Silver prices continue to remain under pressure as they consolidate after last week's large decline. The deleveraging that has taken place in the precious metal complex will make it difficult for silver prices to gain traction and garner the sentiment needed to generate a substantial rally. Worse than expected Chinese PMI data released on Tuesday is hampering the commodity complex creating headwinds for silver prices.
Slower growth has not been a boon for silver prices, as investors perceive there will be less retail buying of precious metals if global growth declines. Last week's weaker than expected Chinese GDP has undermined silver prices. The Chinese government report GDP of 7.7 per cent for the first quarter compared to the consensus estimate of 8 per cent. On Tuesday HSBC reported their flash Chinese PMI which was also weaker than expected for April. As growth in the second largest economy continues to slow, precious metals prices are eroding.
Weak European economic news is also deflating investor sentiment. On Tuesday the Euro zone April PMI came in as expected, steady at 46.5, which is still well into contraction territory while manufacturing was 46.5 vs. 46.7 estimates. With Europe stuck in lackluster growth and the ECB unwilling to throw the kitchen sink at the markets, silver prices are likely to remain under pressure.
Despite the recent decline managed money continued to exit short positions according to the most recent commitment of traders report released for the week ending April 16, 2013. According to the CFTC, managed money reduced short positions by 8,395 contracts while also reducing short positions by 130 contracts. Long positions still outweigh short positions by 8K contracts.
The technical picture for silver prices is gloomy as the above chart shows, courtesy of options trading broker, Scottrade. Although there could be a short squeeze that takes silver prices back to the weekly breakdown level of 26.05, many traders will use that level to initiate short positions. Additionally, there are likely many investors who are long silver from that 26 dollar level who will be looking for a retracement to exit their investment. Resistance coincides with the 5-week moving average which comes in near 25.56.
Weekly momentum on silver is negative with the MACD (moving average convergence divergence index) printing in negative territory. The weekly MACD generated a sell signal in March where the spread (the 12-week moving average minus the 26-week moving average) crossed below the nine-week moving average of the spread.
One positive for silver prices is the fact that price action is severely oversold. The weekly RSI (relative strength index) is printing near 22, which is well below the trigger level of 30 which designates an oversold condition. The RSI is printing at the lowest levels seen during the past four years.
