So, what should we make of the sell-off in silver? Some experts say that the recent sell-off in silver is a great buying opportunity, while others believe there is more to come. Everyone has an opinion, but I don’t trade based on opinions. After all, for every bull there’s a bear, each with the ability to make his or her respective case. As always, I prefer to let the chart do the talking.
One way to analyze a particular commodity, currency or index is to look at the ETF that tracks the underlying security. In the case of silver, please review the following chart of the silver ETF – SLV, with my added notations:
The first thing you will notice is the up-trending support line I have drawn in red. My belief is that any (2) points can start a trend line, but the 3rd test of the trend line confirms its importance to the market. Otherwise, it’s just a line on a chart the may or may not mean something. As you can see with SLV, the market believes that the trend line I have drawn is important. If SLV comes back down to this trend line, a silver bull could expect a bounce. However, if SLV breaks this support line, a bear might expect silver to move lower.
The Tale of the Tape: The silver ETF has formed a support trend line and may come back to retest this line. If you were bullish on silver, entering a long position at the trend line would make sense with a stop below that support. On the other hand, if you were bearish on silver and looking for a short entry instead, a break of SLV’s trend line support would signal the trade. Purchasing the inverse silver ETF –ZSL, could also make a short entry.
Waiting for the most opportune times that I have outlined above could provide you with higher probability entry points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.
Christian Tharp, CMT