Silver’s Sharp Selloff No Cause for Concern

By: Rick Ackerman
Rick’s Picks
Thursday, May 6, 2010

Silver quotes have come back down to earth with a thud, so perhaps it’s time to review our outlook, which was, and still is, quite bullish for both the intermediate and long-term. The Comex July contract has shed a hefty 10 percent of its value since Tuesday, settling at 17.51 yesterday after peaking just two days earlier at 18.89. Although this has caused some gnashing of teeth and sporadic expressions of anguish in the Rick’s Picks chat room, long-term bullion players who frequent the room seem to be taking the move in stride.

We ourselves sounded an especially bullish note a week ago when we wrote that it would be a “piece of cake” for Comex silver futures to push above some daunting reservoirs of supply on the intraday charts. The June contract duly obliged shortly thereafter, but as you can see in the May futures chart below, the rally left one key high at 18.91 recorded in January undisturbed. Although climactic buying missed exceeding that peak by just 2.5 cents, it was enough to make any selloff that followed a possible threat to the short-term picture.



That threat was “actualized,” as they say, by this week’s steep selloff, but it remains to be seen how much more damage will be done. So far, it is minimal, and we therefore still expect the futures to hit a very bullish 21.53 by mid-June. That is our target for the July contract, and it was mentioned in last week’s commentary along with a secondary target at 20.21. At what point would our outlook turn intermediate-to-long-term bearish? That would take a print below 13.89 (!), since, according to the rules of our proprietary Hidden Pivot trading system, that’s what is required to turn the weekly chart bearish. With respect to the daily chart, the July futures need only dip below 16.590 by Friday to hint of serious trouble. That’s hardly unlikely, but even if it were to occur we would give the long-term bullish trend the benefit of the doubt until such time as the weekly chart confirms the negative.

Six Weeks of Purgatory

In the meantime, we’ll view the futures as being in purgatory, tasked with consolidating for the expected push within six weeks or less to 21.53. Our position in silver at the moment consists of 800 shares of Silver Wheaton stock with a cost basis of 11.75. We have been doing covered writes against the stock to further reduce its cost basis and, in line with this strategy, are short eight May 18 calls for 0.64.

http://news.silverseek.com/RickAckerman/1273122240.php

Dan