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« The Future US Dollar Carry Trade | Main | Silver and Silver Stocks: Take Profits »
Saturday
Feb022008

Silver Standard Resources: Set for a Breakout

Despite being of the opinion that both gold and silver are overbought and due for a correction, we are still very bullish on precious metals in the long term. We are equally bullish on Silver Standard Resources, a stock we view as a prime investment vehicle in this silver bull market.

Silver Standard Resources: Set for a Breakout

However in the short term, we have taken profits on Silver Standard as we think this stock is due for a downturn. Due to the technical position of the stock at the moment, this downturn in Silver Standard could be very fast and sharp, a technical downwards breakout from this recent trading range.

Starting with the Relative Strength Index, we see it is standing at 48.35 which is neither here nor there, slap bang in the middle of its trading range, with 30 being considered “buying territory” and 90 as “selling territory”. The MACD and STO are equally hesitant regarding the direction this stock is heading. On both indicators, the red and black lines are trading at virtually the same value as each other, refusing to give a clear bullish or bearish crossover signal. The Bollinger Bands on SSRI are closing, signifiying that volatility in the stock is decreasing. Volatility usually decreases before a breakout, a big move either upwards or downwards. So we know SSRI is going to breakout, the question is; which way?

Looking over to the moving averages, we note that the 50 day moving average is trading at 36.42 whereas the 200dma stands at 36.35, a mere 0.07 between them! Taking into account the recent change of direction in the 50dma, we think it is more likely that it will break down through the 200dma line, than bounce on it. This would be a technically bearish signal, sugesting the stock was in for a significant drop.

However the last time the 50dma broke down through the 200dma on SSRI was back around September 5th 2007, but SSRI shot from about $35.00 to over $45.00 in the two months following this “bearish” technical signal! In fact, what is even more interesting is that when SSRI peaked in late December 2007, the moving average had just given a “bullish” technical crossover and SSRI dropped from over $45.00 to under $33.00 in the two months after that. Therefore if we get a bearish signal from the moving averages, it is not a dead cert that this stock will drop.

SSRI Long Term 030208

Although its a tough call, we are coming out bearish on this stock in the short term, but still maintain our bullish stance in the long run. Although back in September SSRI defied the technical signals by rising dramatically when moving averages were bearish, the situation was very different back then. We had been saying for a number of months that a major rally in precious metals was coming at the end of the summer, and come it did towards the end of August. Silver was taking off and so taking quality silver stocks such as Silver Standard with it. At present, silver has taken off but is now overbought and ripe for a correction. We think the correction in silver will force SSRI down along with other silver stocks and we will probably see SSRI fall faster and more sharply due to the fact that its technicals are balanced on a knife edge.

Just to clarify our trading history on this stock, we first signalled a BUY on Silver Standard when it was $19.98 back in July last year. Since then SSRI has performed magnificently, outperforming the vast majority of its peers.

The Silver Prices Newsletter signalled an additional BUY on Silver Standard on August 20th at $28.99 as we felt the stock had been severely oversold and was ripe for a short term trade or to purchase a position for the longer term. Just a few days ago, we took profits on Silver Standard at $34.82.



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