S.ilver (SI) seems to be moving one way or another over the next few weeks. It’s at or near a point on the chart that has been shown to be significant in the past, and a break seems inevitable any time soon. It could go either way, but fundamental conditions favor a long trade and proximity to critical support creates one that includes protection against a break down.
I spend a disproportionate amount of time staring at charts every day. It depends on what I’m doing for a living, but as I’ve said many times before, they are of limited use when it comes to generating trading and investment ideas. The only real reason past price action could have an impact on an instrument it is trading is because people believe it is. This is especially true in the world of commodities, where pricing is really about simple supply and demand. However, there are times 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 been the bottom of the range since it broke on the way up last July. If it holds up again, and there are reasons to believe it does, the SLV will move back towards the top of this $ 28 range. If it breaks, there is a likelihood of a return to the $ 11-18 area that preceded last year’s surge, regardless of fundamentals.
These fundamentals can essentially be summed up in one word: inflation. Inflation benefits silver in two ways. It’s a store of value, just like its more popular counterpart, gold, but it also has industrial uses. This means that with the general rise in input prices in industry and business, the price of silver should also rise. The only problem here, and the reason a long trade needs to be protected, is that the big surge last year was speculative in nature. Some of these positions are still held and a clean, sustained break below $ 20 will crowd them out, leading to unrelated fundamentals selling.
So the idea here would be to buy SLV at around $ 20.75, but with a stop loss order at around $ 19.50 for twice the amount of the original position. That way, the position will reverse from long to short should it go down, giving you the opportunity to at least offset losses or even make a profit on a trade that didn’t work out. Of course, nothing is guaranteed as it could break down and then ricochet, resulting in a loss on both legs of the trade. This requires putting a stop just above $ 20 when the move to a short position comes and taking that possibility into account when deciding the size of the initial trade.
This approach, which recognizes that a step can be two-way and preparing for both, makes a lot of sense, but it surprises me how few people, especially in the metals sector, actually do this. Investors there seem to be emotionally involved in the product, either they love gold and / or silver or they hate it. This can lead to the movements becoming exaggerated, which will benefit those who have a more practical, logical approach to raw materials.
I usually prefer trades suggested by fundamental factors and confirmed by the chart rather than the other way around, but in this case I make an exception. The $ 20 mark is so critical to the SLV that some movement from here is almost guaranteed shortly, and the nature of silver makes it likely that movement will continue if it does, allowing for a profit in either direction . It’s just too good to refuse.
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