When it comes to making calls in the precious metals space, those dispensing trading advice often are humbled by circumstance. That's because just when you think the market is giving you a clear signal to buy, the selling begins. Conversely, right when you think a top is in and the sector can't go any higher, a commodity like silver just keeps on shining.
In June, I wrote about what was then a massive silver slaughter that took the iShares Silver Trust (SLV) down approximately 35% through the first six months of the year. This exchange-traded fund (ETF), which acts as a proxy for the spot price of silver, had suffered mightily from a capital rotation away from precious metals and into equities.
That rotation punished silver longs, and it made the SLV chart look like a map leading directly through Dante's nine circles of suffering.
Given the depths to which silver had sunk in June, it was my suspicion that SLV was way overdue for a big rally. Well, that's precisely what happened, and since recommending SLV on June 12, the fund is up more than 23%. And given the current market environment, I suspect that there's still plenty of upside left in the silver trade.
One strong argument in favor of a continuation of the silver rally has to do with the precious metal as a safety trade against uncertainty such as geopolitical tension and a rise in interest rates.
In my June recommendation, I also wrote that what was then a massive number of silver shorts, according to data in the Commitment of Traders (COT) report, left those traders extremely exposed to a short-covering rally.
Well, that increase in interest rates happened in June, and it happened again in August. Moreover, the situation in Syria is causing geopolitical tensions to rise.
The scramble to cover short positions has helped SLV spike 25% in the past three weeks. That's a big move, but technically speaking, there isn't reason to suspect the rally is over yet.
In fact, the next real resistance for silver is at about $24.40, a price that represents the downtrend line extending back to November 2012. If that resistance can be overcome, then I suspect it will be an almost straight shot to the high $20s.
Finally, despite the huge rally in silver this month, the current COT data is pretty healthy. The number of net shorts has been cut in half from the record levels seen in April, and the last reading showed the net shorts at about 13,000 contracts. That's well above levels considered to be a sign of too much bullishness (net shorts below 4,000 is the level that silver traders watch for a sign of a top).
The bottom line here is that rising interest rates, continued geopolitical tensions and a healthy COT report all bode well for more gains in SLV, and that means traders still have an opportunity to ride the silver bull before he has to stop for a breather.
Recommended Trade Setup:
-- Buy SLV at the market price
-- Set stop-loss at $21.70, approximately 8% below the current price
-- Set initial price target at $27.17 for a potential 15% gain in two months