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Silver May Be Offering A Buying Opportunity

Posted: Oct 29, 2009 10:02 AM by Joey Fundora

Tickers in this Article: HL, SLW, CDE, SLV

Recently, gold broke out to new all-time highs, sparking a renewed interest in mining stocks. Silver, while not at record highs, has also been benefiting from the same fundamentals favoring gold, namely a weaker dollar. Both of these commodities have been consolidating above their prior bases and may be offering a second chance for traders who missed the initial breakout.

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Silver, as represented by the iShares Silver Trust (NYSE:SLV) ETF, cleared an important resistance level of $15.80 in September, and came back to test this level later in the month. It held this level and surged to new recovery highs. While it set a new high, it had a hard time gaining traction and is now in the process of pulling back. The main question facing traders at this point is whether SLV is topping out here, or offering a buying opportunity. With SLV trading above its prior base, and pulling back to a rising 50-day moving average, the odds are favoring a buying opportunity. The key level to watch in this chart is the September low near $15.80, as a break beneath this level would signal a probable failed breakout. (For related reading, check out the Anatomy Of Trading Breakouts.)

Source: StockCharts.com

Many silver miners are offering a similar opportunity. Coeur d' Alene Mines Corporation (NYSE:CDE) for instance, cleared a similar base in September, as it rallied above $17.40. It pulled back to the $18 level before surging all the way to almost $25 a share. It was starting to trade sideways until the recent pullback. It is now testing the lower bounds of a channel it has been trading in since the July lows. While it's quite possible that CDE will continue to consolidate, the important level to watch is prior resistance near $17.40-$18.00. Much like SLV, this level would be the demarcation area for a failed breakout. (For more, see A Beginner's Guide to Precious Metals.)

Source: StockCharts.com

Silver Wheaton Corp. (NYSE:SLW) is another silver mining company in the process of pulling back after surging to new highs. Much like the others, it is still well above the prior base and a rising 50-day moving average. The level to watch on this chart is also prior resistance, this time at the $11 level.

Source: StockCharts.com

Hecla Mining Co. (NYSE:HL) is a lower priced miner that has been looking good after clearing its base in September. It came back for a retest of the base in late September and has been in the process of building an ascending triangle chart pattern. The key levels to watch are $5.10 for an upside breakout and approximately $4 for a breakout failure. (To learn more, see Trading Failed Breaks.)

Source: StockCharts.com

Bottom Line
One of the most common questions facing traders is whether a pullback is the beginning of a reversal, or a buying opportunity. Unfortunately, the answer is never revealed until it happens. The best we can do is to observe a chart objectively, and attempt to limit risk by only entering when the reward outweighs the risk. These stocks may be presenting buying opportunities in the near future, and as long as risk can be limited, the potential reward favors a possible long trade. As traders, it is often more about taking calculated risks, than about always being right. Do you think silver stocks have topped out, or is this a buying opportunity? Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

By Joey Fundora

Joey Fundora is an independent trader located in South Florida. Joey focuses on using technical analysis techniques to uncover supply and demand imbalances in equities. To see more of his work, visit his site on Stock Chart Analysis.

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