Wednesday, November 13, 2013

SLV: Silver bears

Update 6/11/2014: SLV moved above its 10-day price channel and I've removed it from the Roll Shelf, where it has been waiting as a potential bear play. The chart shows SLV to still be in a bear trend, as it works through wave 5 {+1}, so I wouldn't be surprised to see a fresh signal to the downside sometime soon.

I held two positions in the SLV series. The shares declined by 4.2% over the 38 days I held positions, or down 40.3% annualized.

My options spreads produced a 37.1% yield on debit, or 355.2% annualized.

This concludes the updates to this analysis. I'll do a fresh analysis when SLV gives a new trading signal.

Update 5/5/2014: SLV moved below its stop/loss point, and I have closed the position. Since it is a bear position, the stop/loss point is twice the average true range above the lowest level attained since I opened the position. The price remains within the 10-day price channel and so I have moved the symbol to the Roll Shelf as a potential future bear play. As is my normal practice in such cases, I've deferred calculating results until the entire SLV series of positions has ended.

Update 3/21/2014: SLV has resumed its downward course. It began wave 5 to the downside on Feb. 24 from $21.30 and gave a bear signal on March 19, confirming it the next day. 

I've opened a bear position in SLV, structuring it as bear put spreads, long the $21 puts and short the $19 puts, bought with credit and expiring in July. The leverage is a bit more than 4:1.

SLV has been sitting on the Roll Shelf since December 2013 awaiting a chance for re-entry.

Applying the Elliott wave rules, I expect SLV to decline below $18.26, the end of the prior wave 3 of the same degree. The current wave is the final leg of wave 5 {+1} from August 2013, and the middle leg of wave 3 {+2} from February 2012 and 3 {+3} from August 2011. Long story short, under Elliott that suggests a very large decline over the next year or so.

Wave 3 exceeded wave 1 in length, so wave 5 under Elliott isn't limited. The Elliott wave rule is that a third wave cannot be shorter than both the first and fifth waves of the same degree.

Click on chart to enlarge.
SLV 5 months 2-hour bars

Update 11/13/2013: SLV maintained its downward momentum into the final 30 minutes before the closing bell and I have opened a bear position, structuring it as a bear call spread sold for credit and expiring in December.

The position has 4:1 leverage with maximum yield on risk at expiration of 33.3% and a 3.4% hedge of profitability above the entry price.

Silver and the exchange-traded fund that tracks the metal, SLV -- the iShares Silver Trust -- have been in a downtrend since the fund's peak at $48.35 on April 28, 2011.

In truth, prices of the three basic non-currency stores of wealth -- gold, silver and crude oil -- have all been sliding since 2011, a few months before stocks began their stunning rise. That, of course, means that the much maligned fiat currency, the fourth basic store of wealth, has been in a major uptrend since that year.

The Elliott wave analysis for SLV shows silver to be in the final major downtrend of its decline from 2011, on a scale where price movements can take from a few months to more than a year.

SLV 3 years 2-day bars (left), 90 days 2-hour bars (right)

Within that final wave down, my count shows SLV to likely be in the third, or middle, wave of a downtrend composed of three falling waves with two upside corrections interspersed.

If that count is indeed correct, then I anticipate the completion of its wave iii decline from $22.23 on Oct. 30 to below $17.75, the end of wave 3 on June 27,  will be followed by a correction to the upside lasting a few weeks, and then a final decline to eventually complete wave V of the downtrend from 2011.

An ambiguity of this chart in the very near term is the peak of wave ii. If my placement is incorrect then wave ii will continue correcting in a sideways movement.

SLV has broken out to the downside only once before since the present wave 5 down began from $24.09 on Aug. 28, 2013, and it was a failure, losing 2.2% over 17 days.

The metal has completed 11 bear signals since the larger downtrend began in April 2011. Six were successful, on average yielding 10.3% over 40 days. Five failed, losing 5.4% over 16 days on average.

SLV was one of 14 symbols that survived initial screening overnight. (See "Wednesday's Prospects".)

Of those, five failed confirmation: GLD, IAU, HMY, QRE and FELE.

Four potential bear plays were too illiquid for a short position: AWC, NRP, YZC and CEA.

One bull signal, RHT, has a bearish chart.

That left SLV, another  bear signal on TCK and two bull signals, CTXS and CBI. I chose to analyze SLV because for diversification commodities exposure will bring to my holdings.

The iShares Silver Trust backs its fund by holdings of silver bullion rather than the alternative, futures contracts. The fund expense ratio is 0.5%.

SLV on average trades 6.1 million shares a day and supports an awesome selection of option strike prices spaced 50 cents apart, with open interest running to four and five figures. The front-month at-the-money bid/ask spread on puts is 1.7%.

Implied volatility stands at 33%, near the bottom of the six-month range. A decline from 42% in September ended at 30% in early November and has since risen a bit to the present level.

Options are pricing in confidence that 68.2% of trades will fall between $17.94 and $21.74, for a potential gain or loss of 9.6%, and between $18.93 and $20.75 over the next week.

Contracts today are skewed slightly toward calls, which are trading at 70% above their five-day average volume. Puts are running at 8% above average volume.

Decision for my account: I intend to open a bear position in SLV if it continues to show downside momentum in the last half hour before the closing bell. I'll structure the position as bear call spreads, sold for credit and expiring in December.

If momentum falters, then I'll add SLV to my Watchlist for further consideration.


My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.

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.

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