Silver Blinked First… Did You Notice?

 

Wow, what a big down day for gold and silver and what a beautiful relative weakness setup to get positioned ahead of it. Trades like this are exactly why I pay so much attention to intermarket relationships. This one really checked every box, so let’s walk through it step by step.

Just a few days ago, I started talking about the possibility of a near-term top forming in the metals, and the reason was simple: silver was lagging. I’ve said it many times when the leader is no longer leading, that’s worth paying attention to. Silver typically leads gold during strong upside moves, so when that relationship starts to fray, it’s often an early warning sign.

To be clear, I also laid out my line in the sand. I said that if silver broke to new highs, I would hold off on shorting. And technically, silver did break higher. But instead of invalidating the setup, that breakout actually created new relative weakness divergences, which made the trade even more compelling.

On the chart above, I’m looking at a 2-hour chart of silver futures, with gold futures below it, and a ratio line of silver versus gold in the bottom pane. Start with gold. At point B, gold is trading meaningfully higher than it was at point A, a strong, aggressive push higher. Now look at silver. Even though silver also made a higher high at point B, it was only marginally above point A. You could visually see that silver just wasn’t keeping pace.

If that wasn’t obvious enough, the ratio chart made it crystal clear. At point B, the silver to gold ratio made a lower high compared to point A. That told me the move higher in silver was weak relative to gold. In other words, the breakout lacked real leadership.

Once minor support levels began to break, the outcome was decisive. Both gold and silver sold off hard, but silver led the way down exactly what you’d expect when relative weakness is present. The falling ratio line confirmed that silver was underperforming during the decline as well.

This was a textbook example of how using relative strength or in this case, relative weakness can help you catch tops that are otherwise very difficult to time. Trades like this don’t come around every day, but when they do, you want to be ready to recognize them.

If you want to see how this setup started to form, check out my original post from a few days ago, “When the Leader Stops Leading: A Key Level I’m Watching in Silver.”