The price of silver has exploded in 2016, and is setting up a major buying opportunity on the pullback. The strength of the rally indicates this is the first wave higher in a new uptrend. The rally has dwarfed all recent down moves and is much larger than any rallies seen in the last several years (in percentage terms). Those two factors show that a major shift has taken place, to the upside.
Typical Pullbacks and Buying Opportunities in Silver
Looking at history, uptrends in silver are typically multiple waves, with this recent rally only being the first. That means there is likely a lot of upside left above the August high of $19.71 in the iShares Silver Trust ETF (NYSE:SLV), especially if a good price can be snagged on the pullback. As it turns out, there has been a historically reliable entry point on silver pullbacks.
Based on historical precedent for this type of rally off of a low, silver typically tends to retrace about 50% of the rally. Sometimes it retraces at bit more than 40%, other times it pushes out toward a 60% retracement, so that area provides the “buy zone.”
A 45% retracements takes SLV to $16.71, while a 60% retracement takes it to $15.71. Consider purchases in that region. Not only is the price likely to at least touch that region on this pullback (current price $17.70 as of this writing) but it is likely to reverse and head higher again in that region as well.
Ideally, wait for the price to enter this area and then consolidate (move choppily sideways) for a few days. This shows selling momentum has slowed. Buy when the price moves above the high consolidation, or above the “buy zone” area.
There are no guarantees the historical pattern will work this time, but it is still a good trade. Placing a stop loss below $15 keeps risk controlled in case the silver ETF keeps dropping, and there is ample upside to compensate for the risk.
Upside in Silver
The upside target for the next wave higher is $23 to $26 (price waves take months to play out, this is not a short-term target). At that point, another major pullback is likely to take place, followed by another wave higher. That final wave will likely have the price above $26.50, and possibly above $28. These estimates based on what silver has typically done in the past, as well factoring in the size of the current rally with Fibonacci extension levels.
Trading the Explosive Silver Miners
The Global X Silver Miners ETF (NYSE:SIL) offers a lot more bang for buck when it comes to returns though. While SLV rallied 51% off its December low, SIL rallied 263% off its January low. And no, SIL is not a leveraged ETF.
Silver stocks, which SIL represents, also typically retrace 40% to 55% of the initial wave higher. After such a huge rally, a 60% retracement isn’t out of the question. That puts a buy zone on SIL between $36.61 and $30.70. That’s a big area, but remember this stock exploded 263%, so it is moving a lot.
Wait for the price to enter the buy zone before purchasing. Ideally, wait for the price to consolidate within the buy zone, and then buy when the price moves above consolidation high or above the buy zone. A stop loss on this ETF goes below $27, but ideally down in the $25 region just to give the big-swinging ETF room to move.
This ETF is more volatile that SLV but generally moves in line with it. Therefore, look to exit this ETF when SLV hits its upside benchmarks. If only looking to ride the next wave up, exit SIL when SLV moves above $23 (can place a trailing stop loss to take advantage of further upside). If holding for multiple waves higher in the silver price, exit SIL when SLV is trading north of $26.50.
Silver is likely in the first wave of a multiple wave uptrend that will ultimately take it above $26.50 (conservative estimate based on history) and potentially above $28. With silver pulling back, look to buy SLV and SIL near the 50% retracements levels of the recent advance. Historically, that is where the pullback goes (general area) and then reverses back to the upside. Use the SLV upside targets for finding an exit in SIL.
History is a great guide for telling us what is possible, but there are no guarantees that historical
tendency will repeat this time.