The iShares Silver Trust (SLV) is an exchange-traded fund that tracks the performance of the underlying holdings in the London Silver Fix Price. Shares of the fund were down 24% in the last half of 2016, but over the last several months they have been consolidating in an inverse head-and-shoulders basing formation.
The neckline of the pattern is being retested. The technical indicators suggest the fund is ready to break out, reversing a six-month downtrend.
The daily chart of the SLV ETF shows it making a stair-step series of lower highs and lower lows, following the path of the declining 50-day moving average. The inverse head-and-shoulders pattern began forming last November, with the low that month forming the left shoulder, the December low defining the head, and this month's price action marking the right shoulder. Previous resistance in the $16.30 area delineates the neckline, and it was successfully retested in Friday's strong session.
Daily moving average convergence /divergence is overlaid on a weekly histogram of the oscillator. It is tracking higher and is above its center line on both time frames. This is an indication of positive short-term price momentum and trend. Chaikin money flow has moved into positive territory and is supportive of the rising price and the potential for a breakout. The pattern projects a price target measured by taking its height and adding it to the neckline. In this case, it takes the fund price back up to the former $17.75 area of support, which would be a 62% retracement of the 2016 decline.
This is a significant move, but there may be a more profitable way to trade a silver rally. Look at the following chart.
Shares of the silver mining company Pan American Silver (PAAS) have outperformed the price of the commodity by 140% over the last year, and 20% over the last six months. The chart shows the stock breaking above its December 2016 high this month and successfully retesting that former resistance-turned-support.
In Friday's session, the stock price jumped 3.4% and closed near its high, and the 50-day moving average made a "golden cross" above the 200-day average. The price momentum indicators reflect the recent rally off the December low. The aroon indicator, designed to identify early shifts in trend, has made a bullish green-over-red crossover. Chaikin money flow suggests the stock is under accumulation.
The stock is a long candidate at its current level using an initial percentage stop under the $18 level.
This article is commentary by an independent contributor. At the time of publication, the author held no position in the stocks mentioned.