How Low Can Silver Go?

MAY 12, 2011 4:09 PM

http://expectedreturnsblog.com/how-low-can-silver-go/

The volatility in silver is something that a lot of people can’t handle. When I first invested in silver, I was focused on hour-to-hour and day-to-day movements.  As such, the volatility in silver was the cause of a ton of stress, even if I traded the moves well. Now, with a little more experience, I am less concerned with day-to-day movements in silver. Believe me, there is logic to my change in perspective. Silver is prone to extreme moves, and in extreme moves, classic momentum indicators and technical tools are pretty useless. At overbought levels, common sense coupled with a longer term perspective is far more valuable.

At the top in silver I didn’t say things like “the 5 day RSI is overstretched and 7 out of 10 times this leads to a correction in silver”. My analysis was more along the lines of “silver has gone up 170% in 7 months” and “silver is trading 70% above its 200-day moving average.”  These are longer term approaches to viewing markets. Sentiment also played a huge role for me, and the general consensus that silver couldn’t possibly correct was just icing on the cake.

If you are poised, volatility is your best friend. I have been patiently waiting for a correction in silver, and my focus is now finding entry points to buy back into this correction.

I wouldn’t be concerned at all about the long term prospects of silver unless we dipped below first $25, then $20. The major test for silver will be at the 200-day moving average. As of now, it appears the test will come at about $30. This is a pretty low risk entry point and I will be buying here to feel out the market. In my opinion, this could very well be the last great opportunity to buy silver at relatively cheap prices.

Silver bulls rest assured: this correction is the best thing that could have happened to silver. While silver was rising to the stratosphere, I said that silver needed to correct or consildate to keep this bull market going. Spike moves are the last thing I want to see in an asset I am bullish on. Now that silver has corrected, investors should focus on adding to their positions. As long as silver doesn’t collapse below $25, this correction should be read as a bullish signal.

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