Go Long on Silver

 | Apr 12, 2013 | 5:00 PM EDT
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In recent years, silver has been overshadowed by gold as the precious metal to own. But the iShares Silver Trust (SLV) started to attract more attention with breakouts to the upside over the past two years. It may be a good idea for investors to get into the metal on a bottom via the exchange-traded fund, based on both a technical and quantitative perspective looking inside the silver market, and within its flows and volume as indicated by option traders.

First, observe the market psychology of SLV indicating how traders and investors have perceived the silver ETF. It can be seen in the Elliot Wave structure entered into wave 5 from a normal market cycle viewpoint. Within the normal cycle, a smaller cycle also confirms a wave 5. The Relative Strength Index (RSI), which bottomed out at around 25, is now heading higher (more below on volume indicators and open interest indicators tending to lead price higher).

From a point-and-figure perspective, we like to get a pure price-action view of what price is doing without the noise to anticipate forward movements. From the chart below, we can see that price is coming into a major support region at 25.25. As price is heading higher at this point, both charts seem to confirm one another (the Elliot Wave count on the candlestick chart and major support on the point-and-figure chart).

Market Flows and Color

Looking at flow data from the options market, we see very heavy call volume, which is greater than the spot suggesting that traders anticipate a move in the price of silver. Looking deeper into the market color, the majority of the calls bought were the Jan. $40 calls, of which more than 43.5% were out of the money. Open interest at the Jan. $40 strike was also the highest out of any other strike, indicating that new positions are being put on.

With the technical confirming on many different accounts and the market flows showing signs of increased appetite for call options for the rest of the year, it seems as though all the sellers in the silver market have sold what they wanted to sell; when that happens, there is usually a nice pop. In this case, however, there's more to the story as investors and traders are putting on longer-term bets thinking that silver has room to run to the upside.

Columnist Conversations

today is a good day to lighten the load and take some positions off the table. SOLD WB OCT 85 CALL AT 11 (i...
I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...
I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...
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