Click to Enlarge The previous three times that SLV reached the overbought reading of 70 on a 14-day RSI basis all marked significant short-term tops in the price of SLV.
While the immediate outlook may be somewhat bearish, the longer-term view is most assuredly bullish for silver. The gold-silver ratio, which measures how many ounces of silver are needed to buy an ounce of gold, recently reached a peak of 83 in February.
Since then, this ratio has fallen below the 80 level. The last three times this ratio has fallen below 80 marked significant periods of outperformance for silver versus gold.
The recent somewhat hawkish tone following rate decisions by both the Federal Reserve and the Bank of Japan may also staunch the recent run in SLV.
Click to Enlarge The Fed removed the warning about global risks in its statement, hinting that a June rate hike may be forthcoming. Of course, actions speak louder than words, especially with the Federal Reserve, so we will see if this is just more ongoing jawboning. The BoJ left rates unchanged with the market looking for further easing, pointing to modest recovery trends.
While short term, both the Fed and BoJ may be trying to talk a more restrictive monetary policy stance, the long-term truth remains that rates worldwide sit at accommodative levels. These low rates provide a definite tailwind for the price of SLV stock.
Your SLV Silver Trade
Click to Enlarge The options market paints a fairly neutral picture regarding SLV, with implied volatility in the 57th percentile, favoring option spread strategies over outright option buying or selling.
One of the biggest benefits of options is the ability to construct a trade that fits a viewpoint that is time dependent. In the case of SLV, I am short-term bearish, but long-term bullish. So I can sell call options that expire sooner while buying call options with later expirations.
Specifically, buy the SLV January $17 calls and sell the SLV June $17 calls for 88 cents net debit. The overall spread is net long 10 deltas (slightly bullish) with a maximum risk of $88 per spread.
Ideally, SLV trades sideways until June expiration and then resumes the rally thereafter.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at [email protected]