By Martin Tillier
When studying a chart, sometimes inactivity can be more interesting than wild swings. We all love shiny things that move, so it is not surprising that the bumpy ride of the iShares Silver ETF (SLV) over the last 18 months drew lots of speculation, both verbal and financial. Over the summer, however, things have gotten boring. SLV has tested lows around $26 several times and has failed to break through, but without a significant move to the up side.
When I look at the VectorVest six-month chart for SLV above, however, I see an opportunity for the type of risk controlled trade that I look for. I believe the next significant move will be back towards the $36 highs rather than a break out below $25 for several reasons.
- Golbal Demand Expectations: Because of silver’s many industrial uses, the market’s expectations for global growth are an important factor in the metal’s price. News out of China has not been great, but reaction in all markets was muted. Growth is growing at a slower rate in the all important emerging markets, but it is still growing, and it seems that traders have adjusted their expectations. Even slower growth is still growth.
- A Bottom Has Formed: The chart above shows a solid bottom forming for the price of SLV just above $25. I like charts to be simple and readable, so I am not going to put multiple overlays of squiggles, arcs and triangles on this one. I have included the 50-day moving average (50DMA), represented by the solid, light colored line. The 50 DMA has been tracking lower but has bottomed out, and SLV has closed above the 10 week average for over a week. This re-enforces my belief that the next significant move will be in an upward direction.
- Current And Possible Future US Dollar Weakness: A weaker Dollar usually means higher prices in precious metals. The US Dollar index is up over 10% over the last year, but the last month has seen a steady, if not dramatic, decline. With the European Central Bank rhetoric calming immediate fears of a collapse in Europe, ‘safe haven’ US Dollar buyers have become scarce. Add to that the Fed’s recent hints at another round of dollar value diluting quantitative easing, and the medium term prospects for the dollar don’t look too hot either.
- Nobody Seems To Be Keeping Silver Down: This is the interesting contention, and could be the key to any future rise in the price of the white metal. Rumors have been around for years that one or two big players, most noticeably JP Morgan, have been protecting large, inherited short positions in silver. Selling, or even just placing large sell orders, into a rising market isn’t illegal. It may, however be perceived by many to be manipulative. The contention, such as detailed here, is that increased scrutiny of JPM will leave them, and any others with short positions in silver, reluctant to attempt to hold the market down.
Any one of the scenarios above could result in a rise in silver prices. Combine all four and you have a situation where a move up looks more likely than not.
I have, however, been married long enough to know that I am not always right. I maintain that the key to any trade is to consider and control the downside. Part of the reason SLV is so attractive to me is that while it is hanging around the lows there is a logical and affordable stop loss level. The 52 week low for SLV is $25.34, so a stop protecting against a break below $25 would make sense. A stop loss order at $24.90, placed at the time the position was initiated, would limit losses to around 8%.
If any or all of the scenarios above play out, a move back to $35 or higher is quite possible. As always, the key is to understand and attempt to control the risk going in. SLV hovering around $27 gives an opportunity to do just that.
Martin Tillier has been dragged, kicking and screaming into the 21st century, and can now be followed on Twitter @MartinTillier.