Discussing My Silver Short Position In Greater Detail

On Friday I initiated a short on silver using the SLV exchanged traded ETF. I used July puts with a strike of $24.00. I promised on Friday that I would offer more insight into this trade. For starters however I suggest you all take a moment to read Trader Dan Norcini’s commentary on the silver trade posted today. Trader Dan as he is often referred to went against the silver conspiracy grain and to his credit talks about forgetting the fact that JP Morgan has anything to do with the current price of silver but instead offers a realistic and intelligent way of looking at the current silver market. Forget about all that noise regarding the silver market open interest positions increasing exponentially last week as many of the die hard silver bug conspiracy sites have latched on to as a reason for silver to explode. I urge everyone to read it and get some mature insight into the current situation. He notes in his extensive research that “If we draw out the chart a bit longer, it becomes quite insightful. Notice back to the summer of 2008 when the credit crisis first erupted. The outright short position of the hedge funds is now even larger than it was at that point”. Do Hedge funds foresee a black swan event that got them on the right side of the silver short trade before the 2008 crisis hit?

Now back to my trade. Let me try to explain to you all what puts me on the $24.00 SLV puts. First, a look at the 3 year silver chart.

Take a look at spot silver. It has clearly broken down from the May 2011 high and has never been able to pierce above the upper channel of the down sloping trend since the breakdown in silver occurred on the aforementioned date. Notice too that we have two very important points of potential support. $26.30 represents the area where most of the parabolic buying started that ran silver hard from February to May of 2011. That, in my view represents the very first area of crucial support. The most important level we should be watching on spot silver is the $26.15 low put in on two occasions. Given that silver remains firmly entrenched in its down channel, if that level gets taken out, as I personally suspect it will, then the next major stopping point is $20.00 spot.

Now on to my review of the SLV.

Note that the down sloping line takes us to the relative stopping point for the decline I expect to take place in silver. As indicated on the chart $26.03 is the first level of support for the SLV with $25.65 acting as secondary support. These levels are consistent with the piece I liked to above by Dan Norcini. I. like him believe that $26.00 is the all important level to watch. Should that level fail, that is, should buyers decide to pull bids thinking that further weakness might afford them an opportunity to buy cheaper, then I suspect we are on the fast track to the low 20’s in the SLV. It is my inclination that for the time being, any bullish scenario for owning silver outright is not in play. We clearly have no QE expectations, there isn’t any major shortage in silver given that premiums from the retailers I survey are currently low implying there is plenty of the metal to be had, and considering that the silver market still remains quite weak, if we see a breach of the support areas discussed above, the decline could be rapid. This is why I positioned myself for the move I anticipate.

As will all recommendations, bear in mind these are my own thoughts and do not necessarily imply hey are correct. The usual disclaimer applies and I urge all readers to please consult their licenced broker or financial advisor and to always conduct their own due diligence.