Is the Silver Sell-off Complete?

Today's Idea

Given the wild price swings we have seen in the Silver market lately, it may be difficult for many traders to hold an outright position in Silver, as the potential risk may be greater than most traders can stomach. One option for those who choose to take a position could be to investigate the purchase of debit spreads using options on Silver futures. For those with a bullish slant, exploring the purchase of a bull call spread might be interesting. For example, with September Silver trading at 37.190 as of this writing, the September Silver 43.000 calls could be bought and the September Silver 48.000 calls sold for about 0.720, or $3,600 per spread, not including commissions. The premium paid would be the maximum potential loss on the trade, which has a potential profit of $25,000 minus the premium paid which would be realized at option expiration in late August should the September Silver futures be trading above 48.000.

Fundamentals

After a nearly $18.00 plunge in just over a week's time, Silver futures appear to have found some firm footing near the $32 per ounce level, which has sparked some renewed buying in this precious/industrial metal. The entire metals complex got a boost from a Goldman Sachs analyst who once again recommended long positions in commodities. In addition, the continued strength in the price of Gold may be pulling Silver prices along for the ride, especially as the Gold/Silver ratio has returned to a more "reasonable" 40 to 1. The recent strength in the precious metals sector comes despite a rising U.S. Dollar, which has been viewed of late as "bearish " towards commodities in general. One gets the sense that the demand for "safe haven" investments has returned; especially as it seems that the European debt crisis is expanding. It appears that the sharp sell-off combined with much higher exchange margins has taken many speculators out of the Silver market. This has caused open interest to drop sharply and seems to have restored some health to the overall bull market. Although it appears that prices may have formed a near-term bottom, we may not see a huge move of speculators back into the market until we see daily price trading ranges shrink, as well as margin requirements lowered by the exchanges.

Technical Notes

Looking at the daily chart for July Silver, we notice what appears to be a "V-shaped" bottom formation. Prices are now testing the 20-day moving average, and a close above this widely watched indicator could spur some buying by short-term momentum traders. Even the steep sell-off in Silver prices we saw a few weeks ago failed to negate the longer-term bullish trend, as prices failed to come close to testing the 200-day moving average. The 14-day RSI has moved back to neutral territory, with a current reading of 48.39. Support for July Silver is seen at the May 12th low of 32.300, with resistance found at the May 11th high of 39.470.

Mike Zarembski, Senior Commodity Analyst