The Perfect Silver Wedge

by JDH on September 14, 2013

Apparently Friday the 13th turned about to be a decent day after all, superstitions notwithstanding.  The week started out great, with precious metals stocks like SLW.TO – Silver Wheaton Corp. starting the week at $27.00.  It closed Wednesday at $26.18, a slight drop from the start of the week.  Then came Thursday, with a close of $24.83, about 8% lower than where we started the week.  Not pretty.  Friday looked to continue the blood bath, but no, the stock ended up on the day by almost 3%, and $25.56.  Disaster averted, for now.

Lesson #1: These stocks are volatile.  An 8% swing in four days in a blue chip stock is nothing.  Use this knowledge to your advantage, and buy on dips.

Silver Wheaton Chart

Of more interest is the chart, extending over the past 14 months. (I’m presenting this chart for illustrative purposes; you can pick any silver or gold chart and they look roughly the same).

The most recent peak was the double top that formed in November 2012, when the stock was over $40.  Since then, the direction has been down, with the red down trend line defined by the lower highs in February and August of this year.  Until the red line is broken, the stock is in a down trend.  That’s math.

Fortunately, since the bottom at the end of June at around $18.59, the stock has, hopefully, started a new uptrend, defined by the blue up trend line off the base extending through the $22 level in the first week of August, and the $25 level of this week.

What we have, as is obvious visually, is a medium term down trend line extending for 10 months, and a shorter term up trend line over the last two and a half months.  It’s the perfect wedge.

Mathematically, long term, you can’t be going both down and up.  Eventually, one trend takes over.

If Silver Wheaton drops to $23 this week or next, the blue up trend line is busted, and the down trend remains dominant.  A decisive break above $30 and the down trend line is in trouble.

Which will it be?

I have no idea.  The chart can be used to justify either position.  However, if you give me a few weeks, I can tell you for sure who one this tug of war, because the wedge pattern cannot continue forever.  Eventually the two lines intersect, and we go one way or the other.

Of course my bias is that silver and gold are heading much higher, but my personal biases should not form the bases of anyone’s investment strategy.  In the short term, anything can happen.  The U.S. may have a war with Syria, or Russia, or Iran, or they won’t.  A war in the short term may or may not impact the price of precious metals.

In the long term the government will keep printing money, and eventually that’s inflationary, and eventually prudent investors move to hard assets.  The only question is timing.

My thought experiment is this: if I believe that a year, or two, or three from now precious metals prices will be higher, will I be disappointed at buying these shares at current prices?  I suspect not, but only if:

  • I have a medium to long term time horizon; and
  • I’m using cash, and not margin (or options) that will erode over time and prevent me from having the staying power to see this through to the end.

So, on weaknesses, I will continue to deploy cash.  I will not buy on margin, because another crash is quite possible, and I don’t want to be crushed in a margin call.  I don’t expect a big gain tomorrow, so I’m not buying options either.

I will be content, and I will sit and wait until the world unfolds as I expect it will.

At least until next week.  See you then.