Wednesday, December 10, 2014

Silver: Regaining the bling

Update 12/15/2014: SLV's "bling" quickly tarnished. It reversed to the downside with sufficient momentum to persuade that it was time to close, taking the loss. It was not alone. Gold is down. Oil is down. Not happy days for commodity bulls.

Shares declined by -5.5% over the five-day lifespan of the position, a -399.8% annual rate, and the options produced a -155% loss on risk, for an annual rate so ridiculously high that I refused to type it. Think five figures, the first two being "11".

The silver metal fund the iShares Silver Trust (SLV) gave a bull signal in Tuesday's trading, an event that runs strongly counter to the downtrend that has tarnished its sheen since it peaked in 2011 at $48.35. A downtrend that has lasted more than three years is gray, decrepit, trembling with the palsy that often comes with age, and the break above the 20-day price channel poses the question, Is it a head-fake, or a substantial upward movement?

The Chart

Viewed through an Elliott wave frame, the event is less contrary that it might seem at first glance.  It is overdue for an upward correction, and the count suggests that the time may well be at hand,

The decline since since 2011 form a properly downtrending impulse movement in the fractal five-wave pattern seen within downtrends.

Click on chart to enlarge.
SLV 5 years 2-day bars (left), 30 days hourly bars (right)
I've left the higher-level {+3} degree unlabeled. There is no way from the chart to tell whether the downtrend so far is part of wave 1 {+3} in a larger downtrend, or wave A {+3}, the first step of a correction.

The post-2011 low remains above the 20-year low of $8.45 that, in October 2008, marked the starting point of SLV's final rise.

If that level were to be breached, then it will lend credence to the downtrending impulse movement interpretation.

If wave 3 {+2} did indeed end on Nov 5 at $14.64, then wave 4 {+2}, then penultimate phase of the {+3} downward movement, is under way. It will take back a portion of the decline from the August 2011 peak of $42.78.

It is a 4th wave, and such tend to be sidewinders rather than highly directional. If that is indeed how it plays out, then typically the high might well be in the mid-20s, such as at the 38.2% Fibonacci retracement level, $25.39, with breakouts up to the 50% retracement, $28.71.

At the smallest degree that Ive looked at, on the right-hand chart, I see the rise as tracing out the 3rd wave of some lesser degree. I've labeled as the base degree, but it could well be lower. There is simply no way to tell at this point. That count suggests that there is still some upside remaining, whatever the nature of the upward movement might be.

Returning to the question that led this analysis, Is it a head fake, or a substantial upward movement? The chart doesn't provide a definitive answer.

When a symbol is mired in uncertainty, my answer is to focus on the small. In the short term, it is clear from SLV's chart that it is in an uptrend at the smaller degrees, with no uncertainty or ambiguity to the conclusion.

If I take the play, then I'll want to focus on the volatility, as a quick in and out of the position in order to take the profits before a reversal might occur.


Implied volatility stands at 33%, in the 66th percentile of the rise that ended Nov. 5 at 41%.

The one standard deviation range, encompassing 68.2% of trades of the next week, is pricing in potential gain or loss of 4.6%, and the two standard deviation range, covering 95% of trades, a potential gain or loss of 9.2%.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%Chart
Implied volatility 1 and 2 standard deviations; chart support and resistance

The chart high is a small reversal that occurred Oct. 15. It is quite minor in the general structure of the chart. The first serious resistance to the upside is $20.64, the July reversal point.

The Trade

I'm looking at a very near term trade expiring Jan. 2, the Weeklys issue called the JAN1 series.

I'm proposing a short vertical spread, as follows:

Bull put spread, short the $16 calls and long the $15 calls
sold for a credit and expiring Jan. 2
Probability of expiring out-of-the-money

The rapid drop off of the premium on this grid doesn't allow me much leeway for choosing a short strike. The $16 strike has a 60.60% chance of expiring out of the money for maximum profit. It protect the downside below $15.80 at expiration, covering only a portion of the three ranges.

The risk/reward ratio is 3.8:1.

Decision for My Account

I've taken the trade, structured as described above. The fill came easily, with only a one-cent reduction in my asking price.


My volatility trading rules can be read here. For a discussion of the rationale behind the rules, see my essay, "Rules for very short term trades".

From time to time 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.

My method of scoring price and volatility responses to earnings, used in the "Chart" section, is the simplest imaginable. Looking at the four most recent earnings announcements, I give one point for a rising price or rising volatility in the week after the announcement, subtract a point to a falling price or volatility, and give a zero if the response is  sideways movement. I then add the four quarters together to produce separate scores for price and volatility, and then add the two to produce a combined score. 

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 decisions for his or her own account, and take responsibility for the consequences.

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