What Silver (SLV) And Oil’s Rebound Means For Global Trade

In today’s letter we offer some updated thoughts on the commodities.

We’ll start with the precious metals, whose charts are starting to look surprisingly strong.

For a Change…

The best of them all, without question, is silver, which some four years back led gold to its bull market high, and could very well turn higher now after putting in a bottom.

Nothing’s for certain, of course, and we have lingering doubts about whether the bottom is actually in, but we have to acknowledge what we see. And that is – silver is starting to look good.

Take a peek –

NYSE-SLV-Price-Ceiling

This is the daily chart of the iShares Silver Trust (NYSE:SLV), a good proxy for the metal and, with over $100 million dollars turning over in the stock every day, an equally good place to check for mainstreet investor interest in the metal.

And what’s the chart tell us?

In the first place, SLV’s climb above both her short term and 137 day moving averages some two weeks ago is an indication that we’re now headed for additional gains (red circle). The next immediate line of resistance is the 274 day moving average, seen in orange on the chart, a line which also roughly corresponds with the last retracement high of $17.75 set in mid-January (black line).

SLV will have to best that marker if it hopes to move higher on this bounce. Any setback from that level, or, certainly, any dip below the aforementioned 137 DMA would put the bears back in charge, and we’d likely be looking at a challenge of the bear market lows in the $14.60 range. Key support for the stock comes in at exactly $16.00.

The bulls’ hope now centers upon the RSI and MACD indicators (in blue), whose tandem rise above their respective waterlines in the last few weeks offers the likelihood of additional gains for the metal.

For the bears’ part (and for us at Normandy, too) there’s worry that current volume figures aren’t indicative of any kind of washout bottom whatsoever (in green). And that’s a serious problem.

Here’s a longer term chart of SLV that shows just how excited investors were back in the spring of 2011 when the metal peaked.

Silver-SLV-Price-Top

That tremendous surge in volume was unprecedented, both before and since, and the current tepid action on the stock, we believe, is a clear enough sign that the bear has yet to run its course.

The Worst of Them All

If silver represents the best that the precious metals have to offer, then the miners represent the worst. With prices as depressed as they are for as long as they’ve been, we have a sector, represented here by the Market Vectors Gold Miners ETF (NYSE:GDX), that’s simply struggling to stay profitable.

GDX-price-struggles

Technically, we have a middling to bad picture here. Price is located below the salient 137 day moving average (in red), volumes are declining (in blue) as the shares advance, and while RSI has just poked its head above its midway waterline (black box), at the current rate of advance, MACD could yet be two weeks away from confirming. And that’s a long time in Gold and Silver Investment Land.

The long and short of it is the miners appear caught in a funk, and unless we see continued progress higher from the metals themselves, we could just as easily get a breakdown here as not.

Takeaway – be very cautious on the PMs, despite today’s current flicker of hope.

Oil Rebound is Problematic for Japan

That was gold. This is oil.

It was straightforward mathematics that told us that a country like Japan, that essentially imports all its energy needs, would thrive under a weak oil price. And a look at that country’s stock market from the beginning of the year confirms our calculus.

The Nikkei has been flying –

JAPAN-NIKKEI-AND-OIL

As this longer-term weekly chart shows, Japanese stocks broke out of an eighteen month sideways slump with the advent of cheaper oil prices, whose descent began last June. The index has climbed some 43% since then, and many are calling for further gains. They argue that ongoing quantitative easing and a recent near $30 billion stimulus package, as well as recent corporate tax relief, should spur additional capital spending that’ll keep those gains a’coming.

We would add that a strong U.S. Dollar has added handsomely to Japan’s trade balance, boosting exports dramatically in the last six months and adding to the hope of future earnings growth. Have a look –

YEN-WEAK-PRICE

It all sounds great, right?

Maybe, but what’s going to happen when oil bottoms and starts to turn higher, as we’ve been forecasting for roughly a month. Whither the Nikkei then?

Here’s a chart for oil –

OIL-PRICE-BOTTOM

It appears possible that the turn is in, though nothing’s yet conclusive.

What we especially like about the oil turn story comes from the massive purchases of ETFs that track crude, and in particular, leveraged oil funds like UCO, which have seen some of the biggest names in the investment world take elephant sized positions in the last quarter, according to 13F filings. They include Goldman Sachs, Deutsche Bank and LPL Financial, to name just three.

And they’re not alone. Not by a longshot. Have a look at UCO’s chart –

UCO-LOSING-VALUE

Seems everyone wants in on this one. The number of new shares created for this ETF is astonishing.

So what does it mean for us?

Very simply that a bottom for oil is bad news for Japan, despite all its governments best efforts.

And that’s why we believe this “two way trade” is likely to be a winner.

Here’s what we’re going to do…

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It matches the ProShares Ultra Bloomberg Crude Oil ETF (NYSE:UCO) against the iShares MSCI Japan ETF (NYSE:EWJ).

Options Trader elite recommends you consider the purchase of the UCO January 10 CALL for $1.40 and sale of the EWJ January 14 CALL for $0.16. Total debit on the trade is $1.24.

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It matches the ProShares Ultra Bloomberg Crude Oil ETF (NYSE:UCO) against the iShares MSCI Japan ETF (NYSE:EWJ).

Options Trader elite recommends you consider the purchase of the UCO January 10 CALL for $1.40 and sale of the EWJ January 14 CALL for $0.16. Total debit on the trade is $1.24.

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With love of the hunt,

Hugh L. O’Haynew

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