בס״ד

I Yell, Therefore I am (SLV)

Posted on March 27, 2019

Before we offer up a new trade this week, we have one to report on.

We spoke about rising oil prices last week, and WHAM-O! Jack, we got ‘em.

In Higher Oil Prices In Store, we recommended a bullish trade on USO that looked like this –

“…sell the USO April 18th 11.50 PUT for $0.48 and buy the USO April 18th 10.50 PUT for $0.18 [for a credit of $0.30].  Use those same proceeds to purchase the USO July 19th 13.50 CALL for $0.27.”

Total credit on the affair was $0.03.

And now?

The action has been bullish, friends, so we’re shutting her down.

Close out your April 18th spread today by buying back the 11.50 PUT for $0.08 and selling the 10.50 PUT for $0.01, for a loss of $0.07. Then sell the long July CALL for a fat $0.36, and you earn a net $0.32 on nothing laid down! Accounting for minimal commissions, that’s a gain of 140% in just over a week.

And that smells nice…

Part of the reason we’re terminating last week’s venture is the current strength of the dollar (not to mention the tidy sum earned on the trade).

In short, dollar strength is commodity negative, and we’d be remiss if we didn’t address the buck’s intermediate-term prospects.

With that in mind, have a look at the daily chart of the US Dollar Basket (DXY) for the last year –

Now let’s parse this puppy.

  • First up, as of February, all the dollar’s salient moving averages are unwound and coursing higher (in blue).  And that’s bullish.
  • Second, for the last six months, DXY has traced an ascending triangle formation (in red), a bullish pattern that requires only a break above the upper red line for significant gains to ensue.  Resistance is solid at 97.75, and until that line is bested, we won’t see a substantial move higher for the buck – along with concurrent weakness in the commodities.
  • Finally, both RSI and MACD are resting on their respective waterlines (in green), a phenomenon that often presages a gate-crashing breakout.

How long it will take for that to occur and what might cause it are, of course, unknown.  But what can be expected is a continued churn between DXY 96 and 98 until either 1) the Fed sees signs for another hike, 2) competing currencies (most likely the Euro) take a tumble, or 3) we get a MAGA trade deal that brings hoards of new money into the country to cash in on both perceived and real American economic strength.

What’s also clear is that the dollar has fallen out of favor of late.  After being THE pick of global investment managers back in December and January (and a close second in adjacent months), the long dollar trade has dropped out of fashion in a huge way.

Look here –

And that, too, is a contrarian plus for dollar bulls.

It’s not the dollar, however, that’s caught our fancy here.  Rather, we see the potential for a meaningful drop in the precious metals as the buck heads north, and we’re recommending you consider the following trade – even before the dollar makes its move.

It’s silver we’re after, and this is half a year’s worth of the iShares Silver Trust (NYSE:SLV), the most widely traded silver ETF on the planet.

Note well the head and shoulders topping pattern here (in red) –

Both RSI and MACD (in green) show a security that has been losing momentum – even as buying has driven the price of SLV higher.  Both indicators are also sub-waterline as we write, indicating technical selling is likely to arrive shortly.

We note, too, that there are two gaps to fill on the downside (in blue), the lower of which coincides precisely with the southbound count on the Head and Shoulders pattern.

Look for a pullback to the $13.15 to $13.25 range.

And expect it to unfold in the next eight to ten weeks.

With that in mind that we offer you the following…

A Jew and His Gold recommends you consider selling the SLV September 30th 14.50 CALL for $0.77, and buying the SLV September 30th 15 CALL for $0.56, for a total credit of $0.21.  Then, deploy those same funds for the purchase of an SLV September 30th 13.50 PUT for $0.24.  Total debit on the trade is $0.03.

Many happy returns,

Matt McAbby

Leave a Reply

Your email address will not be published.