Covestor model: Technical Swing
Disclosure: Short SLV
The time is right to short the silver ETF (SLV) after I’ve been watching it for months.
The iShares Silver ETF’s chart has been setting up a very bearish long-term topping pattern, which hasn't been completed yet even with yesterday's declines. The top will be in place if price closes below $26. In that case, however, next major support could be found around $20. The silver ETF might hit a significant "air pocket" and prices could decline rapidly because a lot of stops would be triggered.
Could I have gotten in sooner?
There is always the trade-off between anticipating a breakout or trading the actual event. The former strategy will have a lower win rate, the later one a lower risk/reward since the potential entry point could be quite far from the actual breakout.
I know many traders who do not like to trade on anticipation. I believe that in the case of the silver ETF, there is some underlying weakness that shifts the odds towards lower prices ahead and thus justifying breakdown anticipation.
Fundamentals are actually supportive of HIGHER prices and the metal "should" move higher.
But the fact that it hasn’t moved higher is concerning.
Silver prices are highly correlated to gold, which also "should" move higher: real interest rates are negative, which historically has been a strong driver.
Again: the fact that the gold ETF (GLD) cannot benefit from the current positive fundamental environment is a negative sign.
Another argument for shorting the silver ETF is based on the relationship to the US Dollar: a weaker Dollar usually drives metal prices up.
The greenback actually showed some weakness during the first weeks of June, but the silver ETF barely moved during that time.
So what would happen if the dollar should strengthen again?
For sure, it wouldn't help silver.
The US currency on the other hand is driven by the developments in the euro, and that currency printed a bear flag in the last days. So I am expecting the European currency to resume its decline soon. That's not good for silver.
Finally, I rather like to short silver versus the gold ETF because it is a play on the weakening global economy -- the current market-driving theme. If inflation expectations were the driver, I would instead focus on gold.
So here is the trade I put on:
I took an initial position of SLV at $26.70. It is now 10% of my portfolio.
If I am wrong ("bear trap"), I plan to get out at $27.20.
My price target is $20, so the risk/reward for this trade is compelling.