Over the last few months, one of the worst-performing sectors has been commodities, and silver has been among the biggest losers in that sector. In fact, right now it’s difficult to find an uglier chart than that of the iShares Silver Trust (ETF) (SLV).
In the past year, this silver ETF has crashed from $33 to yesterday’s close of $14.82, and signs of a bottom are still precarious. Year-to-date, SLV is down 20%, and in the past three months, SLV has fared 10 percentage points worse than the also-flagging SPDR Gold Trust (ETF) (GLD).
Much of the reason for the weakness in silver is the stunning strength of the dollar over the same time period. The U.S. FED’s recent decision to terminate its bond purchasing program and the expansion of the quantitative easing program by the Bank of Japan have both sent the dollar soaring, and conversely the prices of most commodities lower.
Beware the Charts
Click to Enlarge The technical weakness in the accompanying SLV daily chart is multifaceted. SLV has fallen below both the 200- and 50-day moving averages, and the 50-day MA has crossed below the 200-day, forming a so-called “death cross.” Previous solid support levels, first at $18, and more recently at $16, have broken down. Lastly, three technical indicators (RSI, MACD, and Stochastic) displayed in the chart continue to show weakness, as SLV has had a difficult time sustaining any kind of rally.
However, the chart of SLV presents us with a great lesson: There’s danger in buying a stock or ETF simply because it is appears to be quite oversold and due for a bounce.
For much of September through early October, SLV’s RSI was in oversold territory below 30. In fact, a buy signal was generated in early October when the RSI crossed above 30, but the rally was short-lived as the RSI never hit the 50 level, and all but the nimblest of day traders probably lost money on their short-term call options.
One month later, the RSI is once again oversold and hovering around the 20 level. Yet the ETF has fallen over $2 during that time frame. Both the MACD and Stochastic Oscillator appear to be moving lower as well. Adding to the negativity is the increase in volume to more than 15 million shares on some recent down days.
Still, shares of SLV rallied a little more than 1% on Thursday. So it might be time to ask: Is there hope for a rebound any time soon?
While we could see a small dead-cat bounce, a stronger move higher does not seem very likely. You have to go all the way back to July 2009 to find SLV support below $15, and then it was in the $11.75-$12 range. History would seem to suggest that even if SLV has another short-lived bounce here, it could well test that range again before it finds support.
So, what can traders do with this?
Two Options Trades on Silver
The first play is on SLV, and it reduces the trader’s risk while offering a quick one-month profit of about 3%. Sell Dec. 5 $14.50 puts on the SLV for somewhere around 42 to 46 cents. If SLV bounces even a little and trades at or above that level a month from now, the puts will expire worthless and you get to keep the entire premium. If SLV falls below $14.50, you would be forced to buy shares at $14.50, but the premium will provide about a 3% cushion below that level, with your breakeven level (before brokerage commissions) at $14.08-$14.04.
Another alternative is to buy shares of First Majestic Silver Corp (AG), which was much stronger than SLV yesterday, finishing up by about 4%. Majestic Silver is expected to release third-quarter earnings Nov. 10, and garnered some interesting buying below $5 on Thursday, before finishing the day at $4.83. AG traded as high as $11 this past August, and so it’s hard not to like it at today’s beaten-down price level.
While both SLV and AG are interesting spec plays, they can be quite volatile. Therefore, caution and nimble trading — with 8% stop-losses set below entry levels on long positions — are advised.
As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.
