Should you buy this dip in silver?

Silver (SLV) started off the week with a bang, with a 6% return out of the gate, well ahead of the 1% gain from gold (GLD). This spike higher in the metal finally saw some capitulation type buying in the metal, with bullish sentiment finished at 95% bulls for two days in a row. These are extreme readings that we rarely see among any asset classes, and this spike in bullish sentiment pushed the long-term sentiment moving average above the dangerous 80% level. ..

While silver has pulled back 2.5% from its highs as of this morning, I don’t see any reason to rush in and buy the dip right away. The reason for this is that parabolic uptrends like the one silver just experience rarely end with ordinary or shallow pullbacks. Instead, they bottom out when the trapped bulls begin to feel sick and puke up their positions, and when sentiment flips from exuberance to back in the gutter. While silver remains in an uptrend and dips are buyable, I would be waiting for a decline of 10% minimum from the highs before doing any nibbling.

The problem with everyone being bullish from a contrarian standpoint is that there’s no one left to buy short-term. Only when the market can flip a good chunk of these bulls into bears or neutrals can the market reset itself and generate new buying interest. The past three times that silver hit these levels of bullish sentiment, the metal corrected 10% or more over the next three months. In the 2016 run for silver, the market topped right at these sentiment levels and never came back. While the latter scenario of a 2016 long-term top is unlikely, I prefer to book profits on the 20% chance that this is what happens.

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