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Silver Wheaton Approaching Key Support

04/23/09 09:11:55 AM
by Donald W. Pendergast, Jr.

Having risen nearly threefold since making a major low in November 2008, shares of Silver Wheaton may be approaching an important test of support.

Security:   SLW
Position:   N/A

Vancouver, BC-based Silver Wheaton (SLW), a consistently profitable player in the silver mining business, has seen its share price move all over the proverbial map during the past year or so, despite having outstanding fundamentals and a unique business model. The company's earnings prospects are very positive, as it is able to generate a stream of progressively higher sales and earnings growth without incurring any additional capital expenditures, an enviable situation that most business owners can only dream about.

As interesting as SLW's future prospects look, right now silver mining share traders are focused on several key elements on its daily chart (Figure 1). We'll see if there isn't an opportunity waiting to be uncovered in this mining arena heavyweight.

FIGURE 1: SLW, DAILY. Third time's a charm? If SLW's two-point trendline succeeds in graduating to become a three-point trendline, a power reversal rally could be a very real possibility. Conversely, a close below the trendline on heavy volume will imply more selling pressure.
Graphic provided by: MetaStock.
SLW's most notable technical attribute is the combined length and angle of its long-term uptrend line, a key support barrier that appears to have an impending appointment with SLW's gradually descending daily candlesticks. Currently, SLW has found a minimal level of support at the combined price level created by the Fibonacci 23.6% retracement and the 50-day exponential moving average (EMA). The 50-day EMA, however, has begun to turn downward by a small amount, and in all likelihood, that red uptrend line is going to act like a magnet, drawing prices closer and closer, forcing a support test. Interestingly, the Fibonacci 38.2% retracement level lies just below the red trendline, residing near the $6.50 level. After such a mammoth, multimonth trend move, a proportional retracement down toward that Fib 38.2% level would be more typical than not.

There are other technicals that suggest that after SLW completes a proportional retracement, the stock will still be strong enough to attempt another run higher; the general long-term trend of the accumulation/distribution indicator is still bullish, especially if its own particular trendlines can survive a further pullback in SLW. In addition, the stochRSI indicator is manifesting a modest positive price-momentum divergence, one that may indicate that most of this price cycle's selling pressure is beginning to abate.

How to play a pullback to either the long-term uptrend line or the Fibonacci 38.2% retracement? One idea is to monitor the stochRSI for a cross back above its daily signal line (in this case, the lower red horizontal line, set at a level of 20), a crossover occurring at or near either of those two previously mentioned support levels. Then simply buy-stop a break above the price bar that confirms the stochRSI crossover, holding on for a cyclically based swing move higher.

Using either the red uptrend line or Fib 38.2% level as the initial stop-loss, simply trail the balance of a move higher with a two- to three-bar trailing stop of the lows, taking half profits if the daily price moves the equivalent of one average true range (ATR) 10-unit (calculated from the confirmed stochRSI crossover daily price bar) and bring the stop up to breakeven. Then look for either a top in the stochRSI (it is a wonderful cyclical top and bottom identifier) and/or the next significant resistance level as a clue for where to consider closing out the balance of the position on a potential reaction move higher from support.

Currently, the $7.30 and $8.30 areas look like the two most obvious resistance barriers should SLW decide to reverse higher.

A trendline can't exist without two related swing highs or lows, but once those two points are established (as in SLW's daily chart), traders begin to anticipate the potential for a third related swing high or low to allow for the extension of the original two-point trendline.

All traders realize that a three-point trendline is a major technical force to be reckoned with, and they respect it as such. Whether or not SLW's trendline holds, there is sure to be some noteworthy price action as price either reverses higher from that line or breaks down through it, launching a fresh wave of selling pressure.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address:

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Date: 04/29/09Rank: 5Comment: 

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