Fin - Breakout - US

Purple Crayon: Buy Silver

Jeff Macke
Breakout

When last we left the Purple Crayon at the beginning of June the headline was Sell Until You Can Sleep. The good news is that if you sold either then or a few weeks earlier when the all-seeing Purple Crayon & Ruler System first flashed danger, you saved a couple bucks. The less good news is whether you sold or not, the market has likely put you to sleep anyway.

The "6-Straight Week Sell-Off!" we media-types spent a month a half trying to get you to care about took us down all of 6%. It was entirely possible to get your face ripped off in some individual names (yes, I'm picking on Research in Motion (RIMM) again), but if you're wound too tight to get through a 6% pull-back in the broader market without losing sleep, you probably shouldn't be in stocks at all.

Since most of us are, in fact, somehow involved in equities, I brought out the waxy divining rod of truth and a straight edge to see if I could find something to buy, sell or hold. Or kill a few minutes, whichever best works for you, the reader.

The trading world still awaits a pullback to S&P 1,250 but it's becoming increasingly hard to care. The market has withstood a deluge of dismal data including weak jobs, cuts of GDP estimates, and increased probability of a double dip without breaking down. That's a good thing, but not a buying thesis. We're overdue for a rally. I still say that rally is to be sold, if and when.

The dollar: The relationship between the greenback and stocks and commodities, and the number of articles I write calling people bad names in the headline, has been well documented. "Dollar down, stocks up" is my basic thesis. Currency being relative, the battle for strength between the dollar and the euro is like a slap-fight in a nursing home -- it's less a matter of which side is "strong" and more a question of which participant is going to survive the longest. Right now, it takes a $1.43 to buy a euro. Anything in the $1.40's isn't worth getting out of the hammock for.

Gold: Now we're cooking with gas! Gold's chart is groovy as all get out. Gold more or less withstood the commodity sell-off, the dollar rally, the subsequent stabilizing of the dollar rally and about a million of the lesser pundits calling gold a bubble. Gold is not a bubble. It may or not be the future currency of the world, but it doesn't much matter to me. Mine is not to question why on commodity charts. Mine is to play technicals, and gold's chart looks wunder-gold-bar.

Silver: I now own silver via the iShares Silver ETF (SLV). Yes, I did call it a bubble. And it was. Now it's not. Silver is finding buyers every time it drops into the $34 to $35 range. That's bullish for reasons I outlined a couple weeks ago . Frankly it's a negative that so many people thought to rage against me for considering a silver buy. It also gives me pause that nearly half of silver is used for industrial purposes, and I believe in the global economy. But concerns are why I always say you can do anything you want as long as you have an exit plan. My exit plan is a close below $33.50. My cost basis is a drip or two below $35, and I'm looking for a possible move to $40 before I start taking gains.

So my risk/reward profile is roughly 4% down, 15% up and a certainty that I will somehow have offended viewers. That works for me.

I'm going to go out on a limb to suggest you guys are going to have comments and questions about my trade. As always, I welcome and read them all. If you wish to be more private (or you get an error message when you comment ... yes, it happens to me as well and the tech department has been notified), send an email to breakoutcrew@yahoo.com.

View Comments (29)