Silver extremely overbought after bullish break, resistance zone looms on the horizon

• Silver’s bullish break above $30 extends further
• $35 a key level for bulls to overcome
• Rarely has silver been this overbought on a daily timeframe

Having taken out its 2021 high on Friday, silver has extended the bullish break on Monday, powering its way above the $32 per ounce on the back of big gains in Chinese commodity futures. Given the speed of the rally, silver is fast approaching $35, a level it struggled to overcome in the early 2010s.

Silver bulls eye breakout to record highs

Having broken out of the ascending triangle it has been stuck in since the start of the pandemic, it’s not surprising some traders are starting to question out loud whether silver may be destined to take out the record highs at $49.51.

However, between October 2011 and October 2012, silver pushed above $35 in six of 13 months but never managed to close above it, making this level potentially important when gauging how far silver’s bullish break may extend on this occasion. It looms as an especially large roadblock for longs if history is any guide.

Source: Refinitiv 

Overbought no impediment to outsized gains

Zooming in, other than how impressive the bullish break has been, the other thing that stands out is just how overbought silver is using RSI on a daily timeframe, sitting at an eye-watering 79.74. To put that reading into context, there have only been four other occasions RSI has exceeded that level dating back to 2015, and on three of them it coincided with a near-term peak.

However, there was one rather larger exception to the rule back on July 20, 2020, when despite being extremely overbought on RSI, the silver price managed to surge another $10 in less than three weeks. For traders, the question now is whether this will be a similar episode? From a technical perspective, the setup on this occasion is far more bullish than then, hinting indicators such as RSI may only be a secondary consideration.

For now, silver was bought earlier today when it fell below Friday’s high of $31.60, making that the first support level of note. Below, a more pronounced support zone is located between $30.08 and $29.82. On the topside, the high so far today was $32.52. As mentioned earlier, beyond, $35 looms as a key test should the price return there.

For now, I’m watching to see how the price action develops. Should the price retest and hold either of the support levels mentioned above, it will allow for long positions to be established above with a stop loss below for protection.

-- Written by David Scutt

Follow David on Twitter @scutty