Silver ETF (SLV) - Time to Take Another Ride?

Good Morning Readers.

As promised I spent a good part of the day studying the Silver ETF (SLV).  Before we begin let’s take a look at the chart. I created this chart at 4:30 after closing so I would have a complete day of trading to base my analysis on.

OK, let’s start at the beginning; On January 28^th I bought the SLV ETF at $26.50. What ensued was a parabolic run up that I had never seen before. I am studying the Trends of Technical Analysis by Edwards and McGee and the sometimes they will use a proxy chart that is a perfect head and shoulders to demonstrate a template or a pattern. If they had wanted to create a chart that demonstrated a parabolic run up, they would not have had to change a thing from this chart. During the week of April 25^th - 29^th I warned my readers that this stock was unbelievably over bought and they should immediately sell. I sold ½ of my position in early April at $38.50 (which in hindsight was too soon but no one ever got hurt taking a profit) and on April 28^th I knew the fun was over and I sold the last half of my position at $47.50. On April 29^th it had its last run up to $48.50. It is important to remember that the market is a zero sum game. Whoever sold at $48.50 on April 29^th means that someone bought at $48.50. All I can say today is I’m glad I’m not that guy. What happened on the week of Monday May 2^nd was scary. The stock went from $48.50 to $34.00 in five days. It was the most massive selloff I have ever seen. On Thursday of that week 250 million shares were traded. That was more than the combined total of the S&P 500 for that day.

          So that’s what happened. Now what’s next?

          For us to understand this it is important to know one of the important factors that led to the collapse of the Silver ETF. On May 2^nd The Chicago Mercantile Exchange raised its margin requirements twice. This was done because hedge funds and speculators had bought this holding with huge margins. That meant that they had bought large blocks of this stock with very little of their own money. If things went sour the speculators would simply walk away from the trade and the holding company would be in a position of holding the stock with very little of the buyers capital at risk. This put the holding companies at great peril and put them in a position of sustaining huge losses. The CME wisely stepped in to protect all parties. [Ed. Note: This was a policy that would have stopped the collapse of the real estate market if it had been implemented in the 2002]. Since the speculators and hedge funds now had to come up with a substantial amount of money to cover their margined purchases and anyone with a cursory ability to read charts knew the stock was about to correct they started to sell off “en masse.” This caused SLV to violently crater.

For those of us that had gotten out of this trade in April this was a very pleasant problem.  If you believe as I do that the debts that this nation has run up are not going to go away and that the devaluation of the dollar is a key to this administrations fiscal policy then holding silver and gold is a good idea. If you don’t agree with this premise then you should not be investing in Gold and Silver be it hard assets or paper assets. I am one of the people who do believe that the dollar will continue to devalue so I want to hold silver and gold.

So now here are the $64,000.00 questions. Where will SLV put in a bottom and where will SLV go to by the year’s end? From the study of the above chart it seems that SLV has begun to put in a floor at the $34.00 level. You can rest assured that while it will not be the smooth parabolic run we experienced in the last run I do see SLV at $60.00 (+/-) by the end of the year. I have made two small purchases thus far one at $32.50 and one at $33.50. I am still reluctant to jump into the water with both feet because there are a lot of very smart people that say SLV could easily go back and test the 200 day moving average at $28.00. Just as SLV overshot the trend on the upside I would not be surprised to see it over shoot the correction on the way down. I would rather patiently buy into this stock because if my analysis of the charts are correct and we do see silver at $60.00 by the end of the year than what does it matter if I buy it at $28.00 or $33.00 or $35.00. On a personal note, I think if memory serves me, I bought a stock once at the bottom. It was dumb luck. I have a saying that anyone who tells you they bought at the bottom and sold at the top is either very lucky (once) or is not completely forthcoming. The great masters, Gerald Loeb, Bernard Baruch and Jesse Livermore teach us that while it is a very hard concept to grasp, you will do better in the long run to buy a stock high and sell it higher than to try and go bottom fishing.

I believe the long-term uptrend in the price of silver has not been broken. Rather than a “bubble bursting” scenario that the media has exploited, this simply indicates a correction to the mean. Silver had obviously gotten way ahead of itself. This correction was both expected and healthy. I believe the bullish fundamentals driving the precious metals rally are still in place, and are only going to become stronger as time goes on. However, volatility in silver is here to stay. Indeed, I believe that the volatile run we saw from January to May was nothing compared to what this run will look like. That is because all of the speculators that propped the market up in the last run are off to greener pastures like frozen concentrated orange juice or pork belly futures.

So in conclusion, you must first be certain in your convictions. Before you ever buy a stock you must believe that it will react a certain way.  So, if you believe, as I do, that the dollar will continue to devalue then I would be a buyer of this stock at $35.00 or lower. I would use a mental stop of $27.00 (one dollar below the 200 day Moving Average) and look for a target price of $60.00 by the end of the year.

I will be posting a video of this stock on YouTube today under the “nom de plume” InvestingAdvicebyGeo at http://www.youtube.com/my_videos?feature=mhee

Please stay tuned for updates, thanks for visiting and have a great weekend.