Jonas Elmerraji

Much like the late comedian Rodney Dangerfield, silver gets no respect.

“Silver is the red-headed step child of the metals desk,” one prominent Wall Street commodity strategist once told me. And he was right, of course. Why, after all, would anyone want to buy silver when gold is so easy to get your hands on these days?
Don’t answer that question just yet…

There’s a difference between thinking about silver as an investor and thinking about the metal as a trader. Today, I want to give you some insight on what a trader sees in silver this month.

To traders, silver can basically be summed up in a single sentence: “Silver is high risk gold.” In other words, when gold moves, silver tends to move the same way – only bigger. If you like gold, then, you should love silver.

From a technical standpoint, even if you don’t really care about gold, you should like silver a lot right now. Here’s why:

The chart above is a daily chart of the iShares Silver Trust (NYSE:SLV), the go-to exchange traded fund (ETF) for folks who want to own silver without actually “owning” silver. SLV takes the money it manages and uses it to buy silver bars that are stored in vaults under London. Not surprisingly, it does a good job tracking the moves of the metal itself.

Taking a look at the chart, it’s clear that silver has had some challenges lately. Silver prices are off considerably from their highs back in late September, but while prices are down, this metal is far from out. That’s because SLV hit support right at $30 late last week.

When you think support, think “buyers”. SLV’s decline got stopped at $30 support because $30 is a price below which there is a glut of demand for silver. In other words, it’s a place where buyers are more eager to buy the metal than sellers are to sell. A bounce off of support is a big positive for silver prices right now because it makes a reversal higher look much more likely.

A couple of other factors add some extra evidence towards a bounce in silver.
First, $30 isn’t just an important psychological number for buyers – it’s also a 50% retracement from the high SLV made in late September to the low it made way back in June. After a big rally, it’s very common for stocks to correct (that is, give back some of those gains before making their next leg up), and when they do, 50% is typically a very reliable retracement level that’s been observed by traders.

Silver’s “momentum” (measured by 14-day RSI, the little graph at the top of the chart above) is another important indicator for silver. While momentum had been dropping for the last several months, it just broke its downtrend this week. And because momentum is a leading indicator of price, that bodes well for silver buyers.

So, does that mean that you should buy SLV? Sure, you could. But SLV isn’t the best silver trade out there right now. For that, we’ve got to look at the miners:

This chart shows the Global X Silver Miners ETF (NYSE:SIL), an ETF that tracks a basket of silver mining firms. Even at a quick glance comparing the chart above with the chart of SLV, it’s pretty clear that the miners are a lot stronger.

Both started rallying in July, but the miners ETF rallied more steeply than SLV did. And while both topped out in late September, the miners corrected sideways while the metal corrected lower.

Clearly, then, if we think that the metal looks ready to bounce higher, the miners should make an even bigger corresponding move. But if we get a little bit more specific, I think we can still do one better…

Take a look at this chart below of Silver Wheaton (NYSE:SLW):

Silver Wheaton is a $14 billion silver mining stock that’s been following the same script we’ve been seeing in the silver metal and the silver mining ETFs: it rallied in the middle of June, topped out at the end of September, and it’s been correcting ever since. But in Silver Wheaton’s case, it hasn’t just been correcting sideways – it’s actually been making higher lows for the past couple of months.

In technical parlance, SLW is making a price pattern called an ascending triangle. Essentially, as shares bounce in between that horizontal resistance level up at $41 and the uptrending support level that connects those lows, it’s getting squeezed closer and closer to a breakout above that $41 price level where selling pressure has been concentrated in the past.

A breakout above $41 is a solid buy signal for Silver Wheaton…

And the relative strength line (at the bottom of the chart above) shows just how much better this miner has been performing than the metal itself. The line compares moves in SLW with moves in the silver metal ETF. As you can see, it’s been in an uptrend for a while now – that means that any dollar gained in the ETF is translating into increasingly bigger gains in Wheaton.

Remember, though, silver stocks tend to be volatile – if you decide SLW is worth buying above $41, make sure you’ve got a stop loss in place…

Happy trading,

Jonas Elmerraji, CMT

Original article posted on Daily Resource Hunter

Jonas Elmerraji

Jonas Elmerraji, CMT, is the editor of STORM Signals and Penny Stock Fortunes. Jonas got his start on the fundamental side of the market, poring over financial statements and valuations to find sound investments today, he specializes in blending fundamental and technical analysis. Jonas is a senior contributor to TheStreet.com, and has been featured as an investment expert in Forbes, Investors Business Daily, and CNBC.com among others.

Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.

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