Silver must test $103 to confirm exit from channel

Silver prices, which have been trending upward for a while, continue to gain momentum. Two significant events occurred last Friday: quotes breached the upper boundary of the current channel and soared above the $100 threshold, hitting a new all-time high. The precious metal almost arrived at $110 per ounce, providing investors with a good opportunity to take profits on their long positions. However, bulls are advised to be cautious: such surges are often followed by sharp drops.

The December 29 session is one of many examples. It ended with a nearly 9% slump. The RSI entered extreme overbought territory that day, reaching the 90 level. This index is currently at 82, dangerously close to this point. The Stochastic Indicator is now generating a sell signal, increasing the chances of a potential correction. The nearest target could be a recently breached upper boundary—$103.

Fast-rising silver is changing the way it is used. Before, about half of demand came from the industrial sector, but now that share might shrink a lot. According to Bank of America estimates, with prices above $60 per ounce, solar panel production in China is on the verge of becoming unprofitable. Given the current sky-high cost of the metal, its use in this segment risks falling by 17%.

Analysts surveyed by Reuters predict a bright future for the asset but recommend refraining from purchasing it at present levels. The two-month rally's incredible acceleration is clearly linked to speculation. Meanwhile, the fervor in the physical market had abated to a certain extent. Stocks at the London Metal Exchange have recently recovered to 200 million ounces from last fall's low of 136 million. On top of that, unlike gold, silver is not quite popular among central banks, which makes it more vulnerable to changes in retail investor sentiment.

Consider the following trading strategy:

Sell silver at the current price, with Take profit at $103 and Stop loss at $110.