Retail Traders Increase Bearish Bets, a Bullish Sign?

Gold, Silver, Retail Trader Positioning, Technical Analysis – IGCS Commodities Update

• Gold and silver prices have been consolidating in recent days
• Retail traders are increasing short exposure, a bullish sign?
• Technical posture remains intact as key support levels hold

In recent weeks, gold and silver prices have been struggling to find the momentum to resume the broader upside trajectory since bottoming last year. From a technical standpoint, while some bearish signals have emerged, the broader upside focus remains. But, from a positioning standpoint, perhaps there is continued support for upside progress.

This can be seen by looking at IG Client Sentiment (IGCS), which tends to be a contrarian indicator, especially in trending markets. In recent days, it seems retail traders have been increasing their downside exposure in gold and silver. Is this a sign that further gains might be in store?

Gold Sentiment Outlook – Bullish

The IGCS gauge shows that about 58% of retail traders are net-long gold. Since most of them are biased to the upside, this hints that prices may fall down the road. But downside exposure increased by 11.66% and 10.04% compared to yesterday and last week, respectively. With that in mind, recent changes in exposure hint that prices may soon resume higher.

XAU/USD Daily Chart

On the daily chart, gold broke under the 20-day Simple Moving Average (SMA). This followed the emergence of a Bearish Engulfing candlestick pattern, increasingly opening the door to extending downside progress. But, confirmation of the 20-day SMA breakout is lacking after the midpoint of the Fibonacci extension at 1977 held. This is maintaining the near-term upside bias. Extending lower exposes the 100-day SMA.

Chart Created in Trading View

Silver Sentiment Outlook – Bullish

The IGCS gauge reveals that 51% of retail traders are net-long silver. Since traders are net-long, this hints price may keep falling. But, net-short exposure has increased by 7.87% and 171.66% compared to yesterday and last week, respectively. With that in mind, recent changes in exposure warn that the current price trend may soon reverse higher.

XAG/USD Daily Chart

Silver prices also face the downside risk of a Bearish Engulfing candlestick pattern. But, unlike gold, XAG/USD has been unable to break under the 20-day SMA, leaving the precious metal in better technical standing than XAU/USD. Turning higher places the focus on April 2022 highs (25.85 – 26.21). Otherwise, falling under the SMA exposes the 50-day equivalent for key support.

Chart Created in Trading View

— Written by Daniel Dubrovsky, Senior Strategist for DailyFX.com

To contact Daniel, follow him on Twitter:@ddubrovskyFX