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Silver Wheaton Tops In Relative Strength Among Miners

09/15/10 08:53:22 AM
by Donald W. Pendergast, Jr.

Up by nearly tenfold since making a major low in late 2008, shares of Silver Wheaton boast of very high relative strength versus its mining peer group. But can this rally continue?

Security:   SLW
Position:   N/A

Yes, it can, but be prepared for a possible correction.

When a monster trend like this is in full force, you don't want to start picking tops when it's far safer (and usually more profitable) to buy the pullbacks to major support areas, hoping to latch on to a fresh swing move higher. However, we still need to be aware of the bigger technical picture affecting the long-term trend, and for that, there are few tools better suited to the job than the Keltner channel. Here's a brief look at the current major support/resistance areas that the Keltner complex is currently identifying for Silver Wheaton (SLW) (see Figure 1).

FIGURE 1: SLW, DAILY. With a significant resistance area near $26 and steadily deteriorating money flow, SLW traders and investors need to prepare for a possible reversal in the days and weeks to come. Out-of-the-money, near-term call sales in the $28-30 area might be one pathway to profit on a reversal lower from $26.
Graphic provided by: MetaStock.
Graphic provided by: WB Keltner bands from Profit Trader for MetaStock.
Nothing super-scientific here, just the cold hard facts that show us where SLW will likely face considerable resistance:

The upper Keltner channel (set at 7.5 standard deviations away from a 45-period exponential moving average [EMA]) has historically been one tough nut for SLW to crack. In the past five years, the stock has only managed to spend one entire trading session above this major resistance barrier.

Currently, the stock has cleared the next lower channel (set at 4.2 standard deviations away from the same 45-day EMA), and while this is bullish in and of itself, take a good look at the current posture of the Chaikin money flow (CMF)(34) in the lower window of the chart; a noticeable bearish divergence with the price action in SLW is evident. If the flow doesn't start to improve as the stock moves up toward the upper Keltner band, the odds are good that the stock will stall out and correct to some degree.

The fact that the 200% Fibonacci extension of major swing AB also lies near that same $26 price zone (pink shaded area) is yet another warning for SLW bulls. Granted, with gold making a new all-time nominal high on Tuesday and with silver also doing very well, bullish fever is running wild, and for all we know, the precious metals complex is about to surge even higher. Then again, every market eventually burns itself out (for a time, at least), catching the less-informed traders and investors on the wrong side of the ensuing trend reversal.

For current SLW longs, be prepared for $26 to act as strong resistance and consider how you may deal with the possibility of a gold/silver train wreck should all of the seasonal pattern longs decide that being long isn't exactly the safest part of the metals market right now.

Call option sales might be one way to rake in some cash if the $26 resistance barrier holds; remember, this stock has only spent a handful of trading days (about a dozen) with part of its daily range extending above the top Keltner channel since late 2005, meaning that near-term call option sales with a price of $28 to $30 might be some of the easier money to be made on this stock, should the $26 level be approached soon.

Short calls will lose a lot of value on a sharp reversal south, so the big idea is to run for cover as soon as possible. When selling naked options you need to be very quick sometimes, and you always want to cover losing trades as swiftly and mechanically as possible, always buying back any short call or put that doubles in price without thinking twice about it. Doing so will help ensure that your trading account will survive to trade another day, hopefully under more favorable circumstances.

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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