“Silver & Co: An Opportunity in the Making!”

By Joshua Enomoto, contributor

What a difference a day makes! After three weeks of significant downturn in the silver market, it appeared that the bears lost downside momentum, and that the bulls would regain control above critical support lines in order to launch a concerted assault on the revered $50 price point. Instead, Friday of November 2nd happened, taking whatever pretense of predictability the COMEX may have had, and shoved it way down the nearest drainage ditch. 38,400 contracts, or 191 million ounces of silver being sold off within the space of 10 minutes can have strange effects on people: Elation for those who received a “word of encouragement” and thus initiated massive short positions, but despair for most not privy to such advanced warning. After such devastating losses, is it wise to be in this market? Prominent commodities experts like David Morgan think so. In fact, there are many compelling technical arguments to suggest that the recent downswing has been overdone, both in the physical bullion itself, as well as the companies that mine it from the earth.

First, let’s start with a technical overview of spot-silver:

Friday’s sell-off puts silver bullion right on the 1st support line, which coincides with the current 200 day moving average. The single day drop was accompanied by immense bearish volume, which is rather peculiar (read suspicious) due to the fact that the overall volume trend was decidedly downwards and negative, as momentum traders, or the weak hands, began to exit the market after silver failed to rally beyond $35 since the announcement of QE3.

Is the technical implication as bad as it appears? There are two schools of thought here. Market participants may want to brace themselves for an attempted mauling of the $30 key psychological support barrier. If the bears can succeed in driving prices that low, it would violate the 38.2% Fibonacci retracement level of the August rally, and would suggest further downside towards $28, the last line of support before a nerve-wracking drop to 26.

On the positive side, we can see that from October 5th until the 23rd of that month, the bears succeeded in taking the price down from the high-34’s to $31.50, which represents a 50% retracement. From $31.50, the bulls put on the brakes and mounted a slow climb right underneath the main trend line, or roughly where the 200 DMA is located. The fact that we saw a rising consolidation pattern develop off the 50% retracement level tells me that most of the weak hands did indeed exit the ma rket.

So what about the Friday sell-off? It’s either conspiracy or lunacy…an act of collusion or a moment of panic. Which brings us to profitability, the art of cashing in on black swan events. Aside from investing in the physical bullion or ETF’s that track spot price performance, another avenue is through the mining industry. While investing in mining companies does have its fair share of critics due to the fact that there are several variables exclusive to the industry that often results in a lack of correlation between the company and the underlying asset, many top silver producers are technically poised for a breakout move. The below is a review of some of these picks.

First up is the stalwart, Silver Wheaton, or ticker symbol SLW:

Looking at a 4-month snapshot, the share price of SLW rose in conjunction with spot-silver, but rather than declining post-QE3, the price has funneled itself into a month-long consolidation period, as confirmed by the converging of the upper and lower Bollinger bands. Usually, when these volatility bands converge, it is accompanied by a strong move, either to the upside or the downside. With the faster 50 DMA line above the 200 DMA and with the Relative Strength Indicator settled into neutral territory, the likely outcome would either be more consolidation or a move up.

Let’s take a longer-term perspective with a 3-year chart: 

Since the crazy season in the precious metals that was 2011, SLW has traded within a declining trend channel, for the most part charting a series of lower highs and lower lows. However, the downtrend was broken with the August rally in spot-silver, and since the current price in SLW is well above the 61.8% Fibonacci retracement of its record high, this has proven to be a very strong company.

However, since we are trading near the all-time highs, I’m not particularly inclined to start buying massive amounts here. So I’d hold a core position, while taking some profits off the table. Any dips, though, are great buying opportunities, as SLW has never violated the 50% retracement level so far.

Next up is SVM, or SilverCorp Metals, Inc.

SVM has a lower valuation than Silver Wheaton and its shares’ price action is more choppy and volatile. It also trended upwards with the underlying asset in late August, albeit in a “see-saw” manner that no doubt made long-term investors sick. Ordinarily, this is not a stock I would look at, but the most compelling part of SVM’s story is its recent upturn. Although Friday’s session took down the stock quite heavily, the prior two sessions indicates positive momentum and a potential upswing in silver bullion could take it someplace lofty, with the 50 DMA poised to cross over the 200 DMA.

Let’s have a look at its 3-year chart:

Clearly, SVM is the silver of silver mining companies, with enough volatility to make Bitcoin investors blush. The scary part is how far the share price dropped from its 2011 highs, well below the 38.2% Fibonacci retracement level. Because of the sharp downward angle, the slower-moving 200 DMA has been above the 50 DMA for over one year, which is usually a bearish phenomenon. However, with the August rally, SVM snapped its declining trend channel and could rise higher from here.

Daring investors could buy in now and hope for some tremendous gains. However, we have to keep in mind that the $6.50 level has been acting as strong resistance, and this price point is halfway between the 50% and 38% Fibonacci retracements. As there are fundamental variables within mining companies to consider outside of the pure technicals, I’d like to see a move past $6.50 and then beyond the 50% retracement before I initiate significant long positions.

Let’s take a look now at Pan American Silver, or ticker symbol PAAS.

Pan American Silver is of course an internationally renowned company and a favorite amongst the silver investment community (at least for those willing to diversify outside of pure physical positions). Along with the August rally, PAAS entered into a month-long consolidation range, very similar to what was observed with SLW. Outside of the Friday COMEX massacre, PAAS received noticeable interest amongst investors, suggesting that the consolidated “squeeze” could result in a break to the upside.

Here’s the 3-year chart:

While the precipitous tumble resembles the year-long decline of SVM, what makes PAAS stand out is its recovery off of the August rally. The price move is much stronger than SVM’s, as it cleared past the 50% Fibonacci retracement level, and is now using that price point as a line of support. Also, the 50 DMA decidedly crossed above the 200 DMA with a vertical incline, whereas SVM appears to have the potential to do so, but has not yet confirmed it in writing. This is a stock that has room to grow and is not an opportunity to PAAS up!

Finally, let’s review Endeavour Silver, otherwise known in the New York Stock Exchange as EXK:

The dirty little secret of the mining industry is that the key to long-term success, and perhaps the only way to success, is “people, people, people.” As such, there are few, if any, better than Bradford Cooke, CEO of Endeavour. Not only is the man a genius, but he has proven success in geological surveys, extractions, and profitable productivity. Even the simple mention of his name, which is a combination of two surnames, carries significant weight and authority. With him on board, there’s almost no point in doing technical analysis, but even there, you can see a shift in momentum and a possible opportunity in waiting.

Let’s take a look at EXK’s 3-year chart:

Out of all the mining stocks we reviewed, EXK is the one that most resembles the price action of spot-silver, as it didn’t fall into a declining trend channel like the others. In fact, a strong horizontal support line developed at the $7.50 price point, and it has stayed the course, much like the $26 support level did for silver bullion. Because of this, I’m very inclined to put money right away into this stock. Also note that there is an inclining level of support, which also represents the main trend line. With a proven management team at Endeavour’s helm, I am confident in their long-term prospects and therefore, I feel that EXK is a strong buy.

Overall, investing in silver is risky and investing in silver mining companies is damn risky, but knowing the key technical thresholds can help swing the odds in your favor when determining ideal entry and exit points. However, with the current fundamentals (central bank money printing, record sovereign debt, potential currency crises, liabilities from natural disasters, to name a few…) so supportive of the miners and the underlying commodity, the likely result, both in the long- and short- term, is higher prices. Therefore, consider the aberration that occurred on the COMEX as an opportunity, not a tragedy.