1.9.10
Trading Silver Futures: Silver bulls have been rewarded for their patience during the recent sell off with a very strong bullish weekly reversal bar, one that also forms one end of a very nice up trend line (see dotted blue line on the chart). For the moment, the momentum is now back in the hands of the bulls, and there seem to be numerous technical clues that suggest that another attempt to take out the March 2008 near $21.19 may be launched soon. A look at the weekly chart for cash Silver may help us discern how far this new reversal may run.

Graphic credit: Metastock v.11

Trendlines, Oscillators and Fibonacci

While the pullback since early December was widely anticipated, due to easily identifiable price-momentum divergences, it has apparently ended in abrupt fashion, by way of this week’s wide-range, bullish reversal bar. With accelerating trend lines firmly in place and fresh oscillator buy signals being flashed, Silver should have little trouble adding a dollar or two to its current price before stalling out again. There are two main factors that lead me to that conclusion:

1. Every time the StochRSI indicator (a hybrid indicator combining aspects of both the Stochastic and RSI indicators) has made a bullish cross above its lower signal line during a confirmed uptrend (an up trending market being characterized by a series of higher highs and higher lows, as is currently the case in weekly Silver), price has rallied to a noticeable degree; note the four red circles near the bottom of the chart to witness the StochRSI’s follow-through toward (and then beyond) its upper signal line during two recent bullish phases in weekly Silver. The price bars have been shaded green to highlight the price gains made in the aftermath of each bullish crossover, and every benefit of the doubt should be given to this new signal, too.

2. The second tip-off that Silver may have enough of a fire burning beneath it to get it moving higher is the fact that it appears ready to cross and then possibly close above the 79% Fibonacci retracement level at $18.50. Silver exceeded this price in early December, but failed to close above it on a weekly basis, so this would be a very bullish development indeed. The main sub -100% Fib levels are 23.4%, 38.2%, 50%, 61.2% and 78.6%, and if a stock or commodity can successfully retrace more than 78.6% on a closing basis, the odds are pretty good that a full 100% retracement will eventually be seen. Fib experts also know that prices will frequently reach one level (in this case, 78.6%) before briefly pulling back to the next lower level (61.8%) before continuing higher. Last week’s reversal bar turned higher just above the 61.8% Fib retracement level of the March 2008- October 2008 sell off, and is now just 5 cents shy of the 78.6% level.

3. On the fundamental side of the equation, Large Speculators (hedge funds) are still carrying substantial amount of long exposure in Silver futures; while not at the record-breaking quantities seen a few months ago, it still is suggestive of massive hedge fund bullishness in the white metal. Of course, the Commercial interests are still carrying extremely large short positions, so expect plenty of tug-of-war price action as each rally of sell off ensues.

Sell a Put.

Here’s a simple, easy to comprehend trade that almost anyone with a futures margin account could qualify for – selling a March 2010 Silver put option with a $15.50 strike price. The put recently settled at $.051, or $255 before commissions. With an expiration date of February 23, 2010, there are only 44 calendar days remaining on this one, and the odds are excellent that this particular put will expire out-of-the-money (OTM) at options expiration.

If you glance back at the chart you’ll see the long (lower) blue dashed trend line; this may be a very tough support level (currently at about $15.70) for Silver to crash through within the next 44 days, especially given all of the bullish factors previously discussed. All in all, this could be a great way to pick up some cash, cash that the market is almost begging somebody to take. Consider selling the put for $.050 or better and then wait for either the option to expire worthless or to double in price, at which point you’d buy it back for a small loss. Keep a close eye on the two trend lines for sharp breaks lower during the lifespan of the trade, as they are your two most valuable tools in helping keep you on the right side of this otherwise low-risk option sale setup. More timid traders might even consider closing the trade out early, say, if the option’s value declines to $.020 of less. Sometimes, when trading the futures markets, it’s better to settle for ‘most of it’ rather than demand the market to give you ‘all of it’ and then ending up with ‘none of it.’

That’s certainly something to ponder should you decide to take this otherwise very attractive put option sale in March Silver. Stay tuned for more developments in Silver, Gold and the US Dollar as they unfold, right here; 2010 may turn out to be one of the most exciting and volatile years in recent market history, offering well-educated traders and investors the opportunity to capitalize on prime trade setups.

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By Donald W. Pendergast Jr.
Contributing Market Analyst
www.EtfTradingPartner.com

October 22, 2009

Everyone would agree – the broad markets have made an astounding turnaround in 2009, with the S&P 500 index up as much as 65% from the March 2009 lows to the recent highs made just a few days ago. Hopefully, you’ve been able to profit handsomely as the market reversed from bear to bull mode, but if not, don’t despair – the broad market is made up of many sectors and industry groups, some of which are on an even hotter bull market rampage than the S&P 500. Hard to believe? Take a look at the charts below for proof positive:

Graphic credit: Metastock v.11

Custom Index
This is a custom silver stock index, one comprised of many of the major players in the primary silver mining industry, names such as Buenaventura (BVN), Coeur d’Alene (CDE), Hecla (HL), Mag Silver (MVG), Pan American Silver (PAAS), Silver Wheaton (SLW) and Silver Standard Resources (SSRI). It’s a simple price-weighted index, one designed to give precious metals equity traders an easy way to track the dominant trends in this highly volatile and frequently profitable industry group. The index made a major, enduring low in late October 2008, bottoming out at $5.27. Just a couple of weeks ago, this index reached nearly $20.00, topping out (for the time being) at $19.85. For those who love interesting statistics, that’s a gain from trough to peak of about 277% in less than 12 months. Even better, one of the index components, BVN, has an annual dividend yield of .29%, adding a few extra dollars of profit for long-term holders of the stock.

The trend of the index is clearly ‘up’, as the blue up trend line plainly demonstrates, and until this particular line is violated on a weekly close, this powerful uptrend should be given every benefit of the doubt. In fact, should the index approach the uptrend line, a significant new buying opportunity may present itself to traders who believe in the long-term prospects for Silver and its related mining shares.

Now, let’s take a look at the S&P 500 weekly chart to compare the two charts:

Graphic credit: Metastock v.11

Good Returns vs. Great Returns – It’s Your Call
Sure, it’s a great looking chart, and it’s not likely that anyone would complain about a 65% gain in less than eight months, but wouldn’t you rather have had the bulk of your money in the sectors and industry groups that were actually outperforming the S&P 500?
With your money in the silver stock index (spread equally across all seven component stocks), you would have increased your money at a rate three times faster than the return generated by the S&P 500 index – for an average gain of nearly 24% per month since October 31, 2008. And while no one knows what the future holds for the broad market indexes or for the seven silver stocks in the index, we do know that industry groups that outperform the broad market tend to continue to outperform. Further, we also know that both Gold and Silver are in major primary bull markets, the likes of which have not been seen in a generation, and that Gold and Silver mining shares typically increase in price at a rate that is usually 200-400% greater than the gains posted by physical (real coins, bullion and bars) Gold and Silver.

Joe Average or Savvy Investor/Trader

So, the choice is yours; you can continue to plow money into an S&P 500 index fund and settle for ‘average’ returns, or you can monitor the various stock sectors and industry groups to determine which are outperforming the S&P 500 index and reap profits that are consistently better that the broad market indexes. And right now, the stocks in the silver mining industry group are among the hottest of all, far outperforming all of the major US stock indexes by a wide margin.

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Mark Brown