Silver ETF Bull Market Remains Intact

by: Chris Vermeulen August 21, 2008 | about stocks: SLV    

Chris Vermeulen

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It’s all too easy to lose yourself and your position under emotional strain.

Let’s face it, it’s hard to think straight when a voice inside your head is screaming get me out of here!

And don’t think emotional reflexes are the preserve of amateurs only. Professional Money Managers are certainly not immune to panics, especially since they are judged on much shorter timeframes and scrutinized intensely against benchmarks and peers.

That said we find 2 trading techniques help us to sit tight with our positions:

1 – Never bet the Farm.

2 – Remain focused on the big picture at all times.

Regarding rule 1: The winner in investing is the one who stays in the game the longest. No matter what kind of slam dunk you think you’ve got, don't go betting the farm, strange things happen under the Sun! The last thing you want to do is take a loss that takes you out of the game permanently. Size your positions accordingly.

Regarding Rule 2: The best way (we find) to remove emotions from the picture is to keep an Eagle eye on the charts. And here we find it best to start with longer dated monthly charts which give us a sense of where price action has been.

Take our current favorite – The Silver Bullion ETF (SLV):

Figure 1 - SLV ETF monthly still in long-term uptrend

Some noteworthy items:

  • SLV has been in a bull market since 2001 and the price has risen by 5X.
  • Since 2002 the 3rd and 4th quarters of each year have been strong for SLV.
  • The current correction is similar in magnitude to the early 2004 correction.
  • Throughout all gut wrenching corrections, the price has remained above the blue uptrend line.
  • The price is now at significant support in the form of the above mentioned uptrend line; horizontal support (second blue line) and 50 Month Moving Average (red circle).

Synopsis: Whilst it is impossible to say whether support will hold (we discuss the fundamentals below) we do think the current level offers an excellent entry point once we have a low risk setup in our trading model.

Let’s take a closer look:

Figure 2 - SLV ETF Weekly Chart

The takeaways from the above chart:

  • The SLV double top in July ($19.17) was difficult to identify because it was somewhat short of the exuberant $20.73 reached in February. However the extreme divergence in the RSI (top) and MACD (bottom) was an early sign that SLV had topped out.
  • Once the price dropped below support at $16 (blue line and 50-week moving average) the chart painted a technical target of around $12 (lower blue line).
  • The correction has followed a classic Elliot Wave A-B-C (marked above) where the magnitude of wave C equals Wave A and once again paints a target for SLV of $12 (red circle).
  • In addition to representing a technical correction target, $12 is strong support on the monthly chart (figure 1) as well as the August 2007 bottom and 200-Week Moving average.
  • We would be amiss if we didn’t point out that $12 has not been reached just yet.

And finally, to round off the picture lets zoom in on the daily chart for SLV:

Figure 3 - SLV ETF Trading Chart, Daily

Noteworthy items here are the 2 gap down events (blue circles) and the potential double bottom in the RSI (top).

The rationale behind gap events in technical parlance is that markets hate a vacuum and usually end up backing and filling the gaps – at least that has been our experience.

The double bottom on the RSI is a hopeful sign that the downward price action is decelerating.

Long-Term Fundamentals for SLV

The fundamentals are probably even more bullish now than before the sell-off (we know that’s no consolation). Supply remains slow coming on-stream as new mines take months and years to get up to full production.

On the demand side, if you believe (as we do) that Precious Metals (Gold and Silver) are the antithesis of financial paper assets. And the institutions who are bastions of those financial assets remain seriously encumbered, with more to come, then you’d agree that the demand for SLV will remain robust.

Anecdotally, the Silver Bullion dealers we have spoken to all tell us that demand for Physical Silver (of which SLV is the ETF) has actually increased since the sell-off and Silver Rounds and Bars are hard to come by.

To conclude: Technically we are near a buy zone for SLV. Whilst we may yet go down to test $12 we are now close enough to the Buy Zone for probabilities to be skewed in our favor. WE will be looking at SLV at these prices over the next few weeks for a possible entry!

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This article has 10 comments:

  •  
    Aug 21 10:28 AM
    These markets move fast. Enter now. If you wait for the possible $12 low, it's not going to happen. We may see $30 before we see $12. Or not. But we will see $30--and much, much higher. He who hesitates is lost. And if you do lose a few dollars on paper here, you will make a lot more than that as the PMs rise, so forget it. Am I speaking from my imagination? No. I've been studying this for years.

    It's like knowing God. Those who know, know. If you yourself want to know God--or make money in this case--follow someone who does know.
    Reply | Link to Comment
  •  
    Aug 21 12:36 PM
    Is that you, Jason Hommel?

    WTF has God got do with SLV? Please keep the comments here on the analytical side. Lest God turn wrathful and SMITE you for being a money changer / lover.
    Reply | Link to Comment
  •  
    Aug 22 09:58 AM
    While many of you were busy painting charts I sold today Gold futures at 835 covered 2 hours later at 825 for a total profit of 1000$ when most of Americans were still asleep.
    Good day silver bugs,I am not a bull or bear,I make money while you sleep.
    Reply | Link to Comment
  •  
    Aug 22 11:12 AM
    The eight or fewer bullion bank traders are still 300 million ounces short and when they cover the price of silver will go up. The "customers" of these banks, offshore companies funded by the central bankers of the world do not want an out of control hedge fund driven price curve in precious metals. Neither do they want to put the precious metals mining industry into bankruptcy. So precious metals prices will be allowed to rise but in an orderly manner. Next stop on the up train before the waterfall drop? My prediction is 25.00. Of course geopolitical events could affect this. Like maybe a war with Iran.
    Reply | Link to Comment
  •  
    Aug 22 04:33 PM
    With the dollar probably bottoming and oil topping in the next couple of weeks, the timing is about right to be looking hard at buying, if not throwing down a few pennies.
    Reply | Link to Comment
  •  
    Aug 23 02:25 AM
    SHARK&PAUL, you are a crashing bore! Or two. Be sure to report the trades that don't win.
    Reply | Link to Comment
  •  
    Aug 23 01:56 PM
    "SLV has been in a bull market since 2001"

    SLV did not exist until 2006.
    Reply | Link to Comment
  •  
    Aug 24 10:37 AM
    Silver is used in the industrial fields a lot. With the economy slowing down so much wouldn't you think it would have less demand... this is supply and demand pricing right?
    Reply | Link to Comment
  •  
    Aug 24 04:46 PM
    Eviladam: Silver's use in industry is widespread and much of it is in consumer electronics and jewelry (a cheap substitute for gold when people don't have the money to buy the yellow stuff) which is unlikely to be greatly impacted even in an economic downturn. Contrast that with copper where 40% of its global use is in construction. In addtion, several major silver-lead-zinc projects have already been shuttered in by crashing lead and zinc prices so there may very well be less future supply than the recent projections. And of course investment demand is the wild card which actually appears to be accelerating. For perspective, consider the late 1970's when the global economy wasn't exactly hot either, there were about 1.5 billion ounces of silver in reported stockpiles, and industrial demand was a fraction of today's level; and yet silver was still able to rally to a high around $50 (almost $150 in today's dollars). If you don't like to judge price levels by spike highs, then try a 200 day moving average around $20 (almost $60 in today's dollars). Silver did have the Hunt Brothers back then but today there is SLV, which already has accumulated DOUBLE what the Hunt Brothers achieved at the peak of their stunt. Importantly, SLV is accumulating in an unleveraged manner and shows no signs of being stoppable. If silver does not outdo its 1979-1980 acrobatics this time, it will be for some reason that is currently unfathomable. Those who consider SLV the enemy of the silver investor have absolutely NO IDEA what they are talking about.
    Reply | Link to Comment
  •  
    Aug 27 12:54 AM
    Silver is used in the industrial fields a lot. With the economy slowing down so much wouldn't you think it would have less demand... this is supply and demand pricing right?
    ======================...

    Besides industry, investment demand has been picking up significantly. The US mint sold more silver eagels in the first 3 months of this year(2008), than the whole of last year (2007)

    The physical silver market remains very tight. I personally ordered silver from the mint back in Feb/March time frame. I just received delivery 2 to 3 weeks back. The price of silver may be cheap, but getting a hold of some ounces may prove a challenge.
    Reply | Link to Comment
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