The recent correction in silver prices from $16.23 to its close of $13.84 yesterday, has hit silver stocks fairly hard, with many losing 20-30% since the beginning of the month.

However amongst this sea of red in the silver sector, great trading opportunities may be just around the corner.

First, let us start with taking a look at the silver chart above.
Note that the Relative Strength Index entered overbought territory just as silver prices peaked at the beginning of June. The RSI may also signal to the bottom in silver prices when it drifts below 30 and enters our buy zone.
Also be aware that silver prices appear to have formed a head and shoulders formation, and therefore it is likely that silver prices have further to fall, possibly to $13-$12 as the head and shoulders formation peters out. We expect silver to fall to between $13 and $12, but not significantly below the $12 level as there is a great deal of support there. Not only has $12 been a support level in the past, but the 200 day moving average is also currently at around $12 and so this adds to the support at that level. We would most probably be heavy buyers if silver were to reach $12.00.

However silver stocks tend to lead the metal and for additional leverage it is likely we would use a silver stock such as PAAS to trade any upcoming bounce or recovery rally in the silver sector.

As explained above, we will be looking for technical signals from the MACD, RSI and moving averages to determine when to buy PAAS. We may buy call options in addition to the stock, depending on the severity of the correction and contracts available.

At the moment PAAS is moving with about a 2:1 leverage to the silver price, and if it can keep this level of leverage up during the bounce, it will prove to be a great silver trading vehicle, possibly gaining 20% in this bounce, and perhaps more if a follow through rally ensues.

Buying opportunities may be upon us sooner than expected, so stay tuned for updates. Even if you are not into trading this sector, long term investors should view this a great opportunity to add to core holdings at discount prices.

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