The decline produced a trend score of 175% of the average daily trading range, which is far from a rout but is still a serious decline.
I construct the score for a bear signal based on the percentage of lower highs recorded on the daily chart during the five days prior to the breakout, combined with the distance traveled, close to close, on those five days.
The huge Vancouver, B.C., silver mining company Silver Wheat Corp. (SLW) closely tracked the metal itself in the decline. It showed a trend score of 144% of the average daily trading range.
In the case SLW, 80% of the days saw a lower high, and the distance traveled was down $1.42.
One difference between the two is that SLV fell on higher volume, and SLW's volume has declined throughout the fall. Generally, I consider a fall on high volume to be more of a rout -- people fleeing -- and a fall on declining value to show a lack of interest, which is a milder condition.
SLW is an alternate way to play the metal. A mininng company can have earnings surprises that impact give higher volatility to the chart. It also pays a small dividend.
A mining company also has far better better analyst coverage than does a metals ETF, so I can learn that SLW's analysts are quite bullish on the company, with a 70% enthusiasm index. The metal? Who knows. It isn't tracked in the same detail as a corporation is.
On the other hand, SLV -- the metals ETF -- can be considered an index option, with favorable tax implications for profits.
For the rest of this discussion, I'll focus mainly on the metal, since it has the stronger trend score, but will toss in a few comparisons with the mining company. Frankly, my personal preference for the simpler play. A company is subject to all sorts of vagaries, such as mismanagement. A metal? Not so much.
News reports suggest the main reason for precious metals' fall was a robust GDP report. The Bloomberg News story can be read here, but the gist of the argument is: Economic growth means less stimulus means higher value for the dollar against other things, such as a precious metals.
Silver's fall is more about the dollar's rise, since the dollar is where the Fed's policy impact will fall.
SLV on average trades 10.6 million shares a day, making it far more liquid than SLW, which trades 3.1 million shares.
The iShares Silver Trust has a huge selection of option strike prides with near-the-money open interesting runing to four and five figures. The front-month at-the-money bid/ask spread on puts is 3%. Actually, Silver Wheaton's spread runs 2.4%, a marginally better deal.
SLV's implied volatility stands at 28%, below the mid-point of its six-month range. It began to rise on Dec. 18. SLW's implied volality is higher, at 40%, which makes it the better choice for selling options, such as in short vertical spreads.
Options on the metal play, SLV, are pricing in confidence that 68.2% of trades over the next month will fall between $26.45 and $31.17, for a potential gain or loss of 8%, and between $27.68 and $29.94 over the the next week.
Volume on SLV put options is running 66% above the five day average, and for calls, 4% above the average.
Today's half hour chart on SLV, with three hours of trading remaining, shows a fair-price zone of $28.68 to $29.06, encompassing 68.2% of transactions surrounding the most-traded price, $28.84. SLV fell into that zone in the second half hour of trading and has stayed there ever since.
SLV, of course, has no dividends or earnings announcements. Silver Wheaton next publishes earnings on March 13. It goes ex-dividend in February for a quarterly payout yielding 0.82% annualized at today's prices.
Decision for my account: I've placed a hold on trading until Washington works out its budget and debt-limit deal. I'm just reluctant to place my future fortune in the hands of House Speaker Boehner and President Obama. Nice guys, I'm sure -- Barrack and Michelle sent me a Christmas card -- but still...
If I were trading, I probably would wait before taking the SLV or the SLW trade. Both showed a serious downside gap this morning, suggesting much of the price move might already have happened. I would want to see what happened on Friday.
Another consideration would be that the year-end holidays are close, with the consequent lowering of liquidity as traders stay home for Christmas and New Year's. It's just not a good time to be trading because there are fewer counter-parties around to take the other side of my positions.
My trading rules can be read here. (They don't talk about the trend score because I'm still developing it.)
And the classic Turtle Trading rules on which my rules are based can be read here.
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.