Monday, December 6, 2010

Silver's "Double Tap" is a Strong Sell Signal

Silver broke to record highs again today, screaming up to another 30-year peak and above the $30.00 / oz mark.

This is where I am going to take the opportunity to hedge against potential losses in the physical holdings I have accumulated for the past 8 years, as well as a great trade setup.

As of this moment, gold has not confirmed silver's high which is a telling sign of massive exhaustion in this rally.  While gold bugs and silver bugs the world over are sure to be proclaiming "this is it!", there is a backdrop of unfettered optimism towards their "sure gains" that raises the warning flag.

  • A smattering of recent DSI readings on gold and silver above 90%
  • Waning internal momentum on each new push higher
  • Most demand increases for the metals have come from the "investment" (speculative) side of purchases versus more practical and sustainable levels of demand
  • China's recent approval of a sovereign wealth fund to invest specifically in gold and silver ETF's around the world
  • COMEX's reserve requirement hike (similar to 1980 in silver's major top)
There are plent of other factors to consider, including this:

For the uptrend starting in 2001, silver has met this resistance line on 3 previous occassions and suffered declines of at least 30%, and each decline has been larger in percentage terms.  Silver "double-tapped" this resistance line as it shot to new highs two weeks ago.

As a hedge against losses in my physical holdings (I will use the proceeds of this trade to purchase more physical in the future), I am short in the futures market at $29.92.  I have also opened up several options trades on the SLV ETF with April 2011 and June 2011 expirations.

Initial trade target is $20.00 after which I will close out 50% of my futures shorts and 50% of my options plays, and $14.50 or a terminal price pattern after which I will close out the remaining portions.  I will keep you updated on this trade as it plays out.

My stop is at $32.25 pending another small spike for a potential total loss of roughly 7.5%, with upside potential of 32%.

Best of luck out there.