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The Day Herschel Lost His Cool (SLV, UUP)

Posted on July 22, 2021

There’s a money war shaping up globally that pits the dollar against a number of upstarts, physical, fiat and virtual.

So young…

The Yuan, Bitcoin and, of course, silver and gold are contending with the buck, in a battle from which only one will emerge as the world’s moolah hegemon.

And as the war develops, we’ll see flips and turns in the relationship between all of the above, some growing in value, others diminishing.

And it’s precisely there that we’re basing today’s trade.

Dollar/Silver

The U.S. Dollar and silver have a long volatile relationship that today offers us a great opportunity to cash in.

In order to understand the trade, let’s walk through a few charts of the iShares Silver Trust ETF (NYSE:SLV), a reliable proxy for COMEX silver.

We’ll then match that stock against the dollar, as represented by the Invesco US Dollar Index Bullish Fund (NYSE:UUP) and see how things shape up.

Here’s SLV –

This is the daily for the last six months, and it shows –

  1. Both RSI and MACD trending sub-waterline (in green), and little sign of that changing over the near-term.  That means bears are in control and price weakness can be expected.
  2. A blow-off surge in volume back in February set prices moving lower ever since (in purple).  That’s consistent with an intermediate trend topping signal and should remain in force for some time.
  3. In the meantime, the moving averages have begun to roll lower (in red), and price is barely holding its 274 DMA (in blue).
  4. Should it lose a grip on that level, the next stop down is the long-term MA at 21 (in black).

Now consider the weekly –

Even more damning –

  1. We have a year-long bearish head and shoulder pattern (in blue) that just this week broke its neckline (in red).  And that, dear friends, is a bear’s delight.
  2. Next weekly support arrives at the 137 week moving average at 119.  And that’s a long way down.
  3. The bunched moving averages at 117 (in purple) will add tremendous gravity to any decline, so a move to 117 is not beyond the possible.

With the downside case for SLV looking very likely, let’s turn now to a comparison of SLV with UUP.

Have a look –

Most important here is the relationship between the dollar and silver.

As you can see, any move in the dollar triggers a massive, opposite reaction from silver.

And because we see dollar strength in the cards now – and huge downside potential from SLV – we’re structuring our trade thus…

A Jew and His Gold recommends you consider selling the UUP December 17th 25/23 PUT spread* for $0.33 (0.41/0.08) and buying the SLV December 17th 23/21 PUT spread** for $0.89 (1.62/0.73).  Total debit on the trade is $0.56.

[*Sell the 25 PUT and buy the 23 PUT.  **Buy the 23 PUT and sell the 21 PUT.]

Rationale: these two ‘moneys’ generally travel in opposite directions, and the trend is now toward a stronger dollar.

That means we can cash in on SLV weakness, but we want it for as cheap as possible.

The trade offers us a maximum $1.44 NET on $0.56 spent – 257%.  A nice little undertaking if it works.

Maximum loss is $2.56 (difference between the UUP strikes plus initial debit), should UUP decline below 23 by expiry – an eventuality we consider dubious at best.

Consider multiple units for a larger haul, if it strikes your fancy pants.

We’ll consider closing early in the event of a swift move lower for SLV.

Place you faith in the Al-mighty G-d of Israel, and like David HaMelech, you’ll never lack.

Many happy returns,

Matt McAbby

 

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