Silver (SI) looks poised to move, one way or another, over the next few weeks. It is at or close to a point on the chart that has proven to be significant in the past, and a break looks to be almost inevitable before too long. It could be in either direction, but fundamental conditions favor a long trade, and the proximity to a critical support sets up one that includes protecting against a break lower.
I spend an inordinate amount of my time each day staring at charts. It is a function of what I do for a living but, as I have said on many occasions, they are of limited use when it comes to generating trading and investing ideas. The only real reason that past price action has any influence on a traded instrument is because people think it does. That is particularly true in the world of commodities, where pricing is really about simple supply and demand. There are times, however, when a chart pattern is so obvious that it cannot be ignored. This is one of them.
The iShares silver ETF (SLV) is hovering just above the $20 level which has basically formed the bottom of the range since it was broken on the way up in July of last year. If it holds again, and there are reasons to think it will, SLV will move back towards the top of that range around $28. If it breaks, then the likelihood is a move back to the $11-18 range that preceded the sharp move up last year, regardless of the fundamentals.
Those fundamentals can essentially be summed up in one word: inflation. Inflation benefits silver in two ways. It is a store of value, just as is its more popular counterpart, gold, but it also has industrial uses. That means that as input prices generally rise in industry and the economy, the price of silver should rise with them. The only problem here, and the reason a long trade would need to be protected, is that the big jump up last year was speculative in nature. Some of those positions will still be held and a clean, sustained break below $20 will squeeze them out, prompting selling that has nothing to do with the fundamentals.
So, the idea here would be to buy SLV at around $20.75 but with a stop loss order at around $19.50 for double the amount of the initial position. That way, should it break lower, the position will reverse from long to short, giving you a chance of at least recovering losses, or even turning a profit on a trade that didn’t work out. Nothing is guaranteed, of course, as it could break lower and then bounce, resulting in a loss on both legs of the trade. That necessitates setting a stop just above $20 if the switch to short comes and keeping that possibility in mind when deciding the size of the initial trade.
This approach, recognizing that a move could come in either direction and preparing for both, makes a lot of sense but it surprises me how few people, particularly in the metals space, actually do it. Investors there seem to get emotionally involved in the product, either loving gold and/or silver, or hating it. That can lead to moves getting exaggerated, which benefits those with a more practical, logical attitude to the commodities.
Normally, I prefer to take trades that are suggested by fundamental factors and the confirmed by the chart, rather than the other way around, but in this case, I will make an exception. The $20 level is so critical for SLV that some movement from here is almost guaranteed before long and the nature of silver makes it likely that when the move comes, it will be sustained, allowing for a profit in either direction. That is just too good a set up to turn down.
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