|I touched on Silver Standard Resources (SSRI) a few weeks ago, recommending that investors accumulate shares on weakness. I advised doing this despite the fact that a breakdown was likely. For example, note how prices were hugging the bottom parallel line of the black pitchfork up until early December. Because multiple tests of support tend to fail in time, I reasoned a breakdown was possible in the near term. This is why I recommended buying around the $13.00 level, the site of the bottom purple parallel line. Unfortunately, support here was short-lived and prices have proceeded to pull back further.|
|However, there are some interesting developments on Figure 1, which could point to a forthcoming reversal. More specifically, last week's low occurred right at the 61.8% retracement level ($11.70) from the May to October rally. Because the 61.8% retracement tends to act as the ultimate reversal point during corrections, last week's bounce here was bullish. In addition, notice how the relative strength index (RSI) and moving average convergence/divergence (MACD) are showing bullish divergences. Both of these indicators put in double bottoms recently, despite the fact that prices moved lower. |
Last but not least, the median line of the blue pitchfork has yet to be tested. Per my prior article, when prices test the top parallel line of a pitchfork without testing the median line first, it is a sign of strength. As a result, I believe SSRI will eventually break above the top blue parallel line despite the short-term downtrend.
|Figure 1: One-year chart for Silver Standard Resources|
|Graphic provided by: StockCharts.com.|
|If you look at the underlying commodity (silver), you will see a similar setup. More specifically, note how prices recently bounced off key support in the $6.50 to $6.70 range. This is the site of the continuous contract's 200-day moving average ($6.69), May's uptrend line (dotted green line) and the 61.8% retracement from the May to December rally. In addition, the median line of the light blue pitchfork is right below ($6.40), adding to potential support here. Given the limited downside risk in silver and the developing bottom in SSRI, I would continue to accumulate shares of Silver Standard Resources in the near term.|
Figure 2: Silver, continuous contract
|Glen Allen, VA|
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