Between the December 17 low of $13.04 and the August 2 high of $19.71, the iShares Silver Trust (SLV) advanced 51%. Since April pullbacks have been short-lived, meaning traders have had to be aggressive on their entries in order to benefit from the rapidly rising price. Markets don’t move in straight lines though, and after a such a strong advance many investors feel pressured to get in near highs, for fear of missing even more of the move. SLV closed at $18.68 on August 17, marginally off the $19.71 high. While that is a slight discount compared to the recent high, a much deeper pullback is likely to develop. That pullback will offer a buying opportunity in the $16.50 to $15.50 region. That “buy zone” offers a lot more potential upside (within this expected long-term uptrend) than buying near $19.
Silver miner stocks (and silver miner ETFs) have also soared on the silver rally, and they too will offer a major buying opportunity on the next pullback. Here’s what to watch for, both in the iShares Silver Trust and the Global X Silver Miners ETF (SIL).
When the iShares Silver Trust bottomed in 2008, the rally that ensued is playing out very much like the 2016 rally. That historical precedent indicates that there is a more upside to come in silver, but the bulk of that upside won’t materialize until there is a sizable correction. That doesn’t mean silver can’t edge higher, but a sizable pullback is more likely than a sizable rally as of mid-August.
History shows that when silver has a big rally off a bottom, it typically retraces about 50% of the rally. Based on the $13.04 low and the August high of $19.71, the 50% retracement of that advance is at $16.38. That level may change slightly if silver continues to creep up in the short-term, but it provides an approximate buy location for when the pullback does develop. After a rally of this size, a retracement of 60% also is conceivable. The 60% retracement level is $15.71. That puts a buy zone between $16.38 and $15.71, which, based on history, is where the price is likely to decline to and then bounce off of, continuing the uptrend. The rising trendline, going back to December, runs right through the middle of that retracement zone, providing technical support for buyers.
The upside profit target, if the price pulls back and bounces off the prospective support zone, is $23. That’s a relatively conservative price target based on the size of the recent rally, but as the price moves above $23 it is more likely to experience another major pullback.
The Silver Miners ETF bottomed at $14.94 in January and rallied to an August 12 high of $54.34. That’s a 263% advance. While it is tempting to jump in and buy in such a hot market, buying on the pullback provides the much bigger reward. This is likely only the first wave higher in a multiple-wave uptrend, so buying on the pullback provides more upside potential than buying above $50. A 50% retracement in silver miner stocks pushes the ETF price back to $34.64. A 60% retracement takes the price back to $30.70. If a pullback develops, $34.64 to $30.70 is the buy zone. Following the pullback–if it enters the buy zone–the upside price target is $70, based on the size of the initial advance. The price could advance well beyond that, but above $70 the chance of a sizable correction increases.
The Bottom Line
There is no assurance a 50% to 60% retracement will develop in silver and silver miner stocks, or that the retracement will only be 50% to 60% (it could be bigger). Based on historical rallies off of bottoms, though, prices typically retrace about 50% and then continue to rally to the upside. These are volatile markets right now, so the use of a stop-loss is recommended. Place the stop-loss several percentage points below the low of the buy zone.
Now is not the time to be aggressively buying silver. Patience is likely to yield much lower entry points, providing greater profit potential on the next advance, as silver and silver miner stocks have likely entered into a long-term uptrend.
Courtesy: Cory Mitchell
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