Silver (XAG) Forecast: Can Bulls Clear the 200-Day MA After Friday’s Bounce?

Spot Silver Bounces on Iran

With the Iran war expected to wind down with the signing of a peace deal on Sunday, crude oil broke lower, and silver caught the bid. President Trump called off further strikes Friday and declared the conflict effectively over. The news may have been enough to provide short-term support for silver over the short run. However, late Sunday, doubts surfaced after Israel struck Lebanon, prompting Trump to warn about blowing the deal.

Spot Silver (XAGUSD) settled at $68.04 on Friday, June 12, gaining $0.69 or 1.02%. The metal had been under pressure all week with the Middle East conflict and rate fears keeping traders defensive. Friday’s combination of peace headlines, falling crude, and aggressive short covering gave bullish traders something to cheer about over the weekend, but we won’t know until the ink on a deal is dry.

Daily Spot Silver (XAGUSD) Technical Analysis

Spot Silver (XAGUSD) closed higher after confirming the previous session’s closing price reversal bottom at $61.50. Strong speculative buying and aggressive short-covering took place as the market approached the March 23 main bottom at $61.00 and 50% of the all-time high at $60.83. Additional support is a long-term bottom at $59.34. It’s also the trigger point for an acceleration to the downside.

The main trend is down, but the closing price reversal bottom often indicates that the buying is greater than the selling at current price levels. It does not represent a change in trend.

Overcoming the 200-day MA at $68.29 will indicate the presence of buyers. If the move creates enough upside momentum, then look for the rally to possibly extend into the 50-day moving average at $75.54. We could see an acceleration to the upside if this level is taken out with conviction.

The inability to overcome and sustain a rally over the 200-day MA will indicate the buying is still weak and the selling is strong. This could lead to another test of the $61.00 to $60.83 area. If $59.34 fails, then look out to the downside, $46.48 is next.

Crude Oil Cracked on Peace News

Trump declared the war with Iran effectively over Friday, calling off further military strikes. With that development, WTI and Brent crude oil tested two-month lows. Months of fighting around the Strait of Hormuz had kept energy costs elevated across the global economy, while drawing down supply. If the Strait is opened, the narrative while shift from “where is the oil?” to “how fast can we fill our storage tanks?”

The good news is, falling oil prices may have helped ease months of inflation anxiety. The not-so-good news is that fresh demand from relatively cheaper oil could put some of those worries back on the table. Oil had been the single biggest cost driver since the Strait of Hormuz closed in late February. Crude coming down this hard slightly weakened the strongest inflation argument and may have given the Fed space it did not have a week ago. But we won’t know for sure until the Fed comments on the situation on Wednesday.

Fresh CPI and PPI reports earlier in the week reinforced the bearish narrative for silver. According to the government reports, inflation is still running above target, but the acceleration is fading. However, those reports are old news with a peace deal perhaps resetting the inflation watch indicator. Silver traders already know what high oil prices can do to the inflation outlook and the odds of a Fed rate hike in December. Now, they are going to get to see the impact of potentially stable oil prices. The question is, will silver traders continue to keep a lid on prices as oil prices settle, or will the bulls re-emerge on bets the Fed will take a rate cut off the table. We should know on June 17 whether the anticipation of lower oil prices gives the Fed more room to stay patient.

The resumption of the previous bull market in silver will be right around the corner if energy cheapens, inflation prints lower and the odds of a December Fed rate hike diminishes. Lower crude will have a wide impact on many facets of the economy. This will lead to softer inflation and lower expectations of a Fed rate hike late in the year. The latter will likely force the hand of short-sellers in silver, leading to an extended short-covering rally.

Did Short Covering Drive This Rally?

Most of Friday’s gain came from short-seller reaction to the possibility of a peace deal and general nervousness ahead of the Fed meeting. Traders, betting on prolonged inflation and perhaps multiple rate hikes by the Fed likely squared positions aggressively on Thursday and Friday. The upcoming weekend and next Wednesday’s Fed meeting created too much uncertainty for some of the weaker bears to handle. Additionally, some didn’t want to take on the added risk of the peace deal blowing up ahead of Monday morning’s opening.

The price action on Friday looked a little different too, with silver moving more like a risk asset. The catalyst was clearly the easing of Middle East fears. Some technical traders also viewed the market as oversold by some metrics after multiple consecutive sessions of losses. The combination of short-covering and speculative buying on both Thursday and Friday was evidence that traders were watching more than just the fundamentals.

Friday’s 1.02% gain does not look very large when compared against the recent selloff, but it stood out after five of the past seven sessions went to sellers. Furthermore, it did confirm the shift in sentiment from the previous session.

The question now is: “Will real buying conviction follow the two-day rebound?” Short covering reverses the price slide, but does not create a floor. If Tehran signs and the Fed holds steady, the buying has a reason to continue. However, a breakdown in negotiations and a hot signal from the Fed will put sellers right back in charge.

What to Watch

The Federal Reserve meeting on June 16-17 and the Iran deal timeline decide direction next week. If the Fed holds rates steady and inflation keeps cooling, silver may get the support it needs to recover key support areas. Without both, Friday’s covering was a one-session event.

Traders’ reaction to the 200-day moving average at $68.29 sets the tone on Monday. Overcoming it with strong buying volume will put the 50-day moving average at $75.54 on the radar. A failure at the 200-day MA, however, could send the metal back toward $61.00 to $60.83.

More Information in our Economic Calendar.