MLR - Silver sliver

Published : May 2 2011 at 8:20 ET

Silver's churning action on April 25 was a cautionary sign. The next day, silver ETF SLV gapped down, losing nearly -4% on the day.

Silver then had a second day of churning action on April 28, a day after it put in its pocket pivot, also a cautionary sign. Today, in premarket trading, the silver ETF SLV looks to gap down -6.1% as of this writing.

As we've stated, silver is not for the faint of heart, especially for those initiating new positions as opposed to those who are adding to their positions who already hold a substantial profit in silver.

Silver's high level of volatility looks to continue. If you own what you consider to be a larger than normal position in silver, you may consider taking some profit here. If you are a shorter term trader, you might consider taking some profit here, or you might initiate a position on weakness. If you're investing for the longer term move in silver, as we've expressed views we see silver as heading higher over the longer term while short term corrections are to be expected, then you could sit through a correction of some magnitude as long as it does not violate your risk tolerance rules.

The gap down in a commodity that has had a big upside move is potentially different than a gap down in a stock. A stock usually gaps down due to something material that has changed within the company, such as disappointing earnings or revenue projections. By comparison, the fundamental backdrop for a continued rise in precious metals remains in place. Also, the gap down in silver on the chart relative to the move it has had is relatively small. As we've noted in prior reports, silver's corrections have been short lived.


Bottom line: Set your sell stops according to your risk tolerance rules, and if it hits your sell stop, sell no questions asked. You may also decide to add or initiate a position in silver on weakness. Keep note of how SLV behaves around its 20dma. SLV only violated its 20dma in January 2011, then corrected for 3 weeks with a -14.5% pullback in SLV, before resuming its uptrend. And if silver is too volatile for your style, then sit it out. Focus on less volatile gold ETFs such as 1-times ETF GLD and 2-times ETF DGP.


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