Can Silver and Oil Rebound Further?

05/11/2011 10:50 am EST

Focus: COMMODITIES

Thomas Aspray

, Professional Trader & Analyst

Investors caught in the crossfire while the two commodites plummeted last week should hold on and follow their stops. This week's action will either confirm a rise or provide a buying opportunity into the medium-term trend, which is still quite solid.

The carnage in the commodity markets was not limited to small speculators, as one $2.4 billion hedge fund reportedly lost $500 million on their long crude-oil position last week.

I expect to see further reports about what silver’s plunge did to some hedge funds, but feel that individual traders may have been the primary victims.

Still, the severity of the decline is likely to have cut down some of the bullish sentiment on both the precious metals and crude oil, which was too high. Both markets have rebounded impressively so far this week, as July crude oil is $9 per barrel above last week’s lows.

I am sure this rollercoaster has added to the frustration of many traders, as those who were stopped or forced out last week are probably quite angry—and those who are still long are wondering what to do.

From a technical standpoint, the rebound was not surprising, but it does suggest that the next week or so of trading may set the tone for the next month. Watching the action in the PowerShares DB Dollar Bullish ETF (UUP) may give us some valuable clues over the next week.

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Chart Analysis: The PowerShares DB Dollar Bullish ETF (UUP) follows the price performance of the Deutsche Bank Long US Dollar Futures Index., minus expenses and fees. It has been declining steadily from the May 2010 high of $25.83.

  • The rally from last week’s lows has taken UUP to its short-term downtrend and the starc+ band. When prices are at the starc+ band it is a higher-risk time to buy, and when they are at the starc- band it means lower risk. (For more, see Buy, Sell, or Wait: A Way to Decide.)
  • There is further resistance for UUP at $21.75 to $22 and then more important levels at $22.75
  • The daily on-balance-volume (OBV) did move briefly above its WMA before turning lower and it made new lows with prices. A move through the downtrend (line b) would be a positive sign
  • The weekly OBV (not shown) is still negative and below its WMA
  • There is short-term support now at $21.30 to $21.20, with further intensity at the gap in the $20.94 to $21.06 area

The July crude-oil contract dropped briefly below the major 50% support level, into the $96 area, last Thursday, before turning higher Friday. July crude closed at $104.47 Tuesday.

  • July crude is now 9.7% above last week’s lows, with the 50% retracement resistance at $105.31 and the 61.8% resistance at $107.61
  • The former uptrend (line c) is now just above $109, with very strong resistance in the $111 to $113 area
  • The daily OBV held above longer-term support (line b), and has now moved back above its WMA
  • The daily OBV did make new highs with prices last week, which is a positive sign. The weekly OBV (not shown) is still positive
  • Given the extremely wide range over the past few days, there is first support at $100.68 and then at $97.96

NEXT: Silver, Gold Analysis and How to Profit

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The iShares Silver Trust (SLV) dropped to a low of $33.58 last week, but held above the major 50% support at $32.76. Two consecutive daily closes below the starc- band increased the odds of a rebound.

  • SLV closed at $37.52 Tuesday, and next has the 38.2% resistance at $39.18, with the 50% and the starc+ band at $39.88
  • There is formidable resistance now in the $42.50 to $43.50 area
  • The daily OBV dropped below its WMA on May 3, and violated support (line a) later in the week. The weekly OBV did confirm the recent highs, and is still positive
  • There is initial support now for SLV at $36.50 to $35.80, and then in the $34.50 area

The decline in the Spyder Gold Trust (GLD) held just above the breakout level (line b) last week, with a low of $142.55.

  • GLD has already reached the 50% retracement resistance at $148.05, with the 61.8% level coming up at $149.38
  • There is much stronger resistance between $149.80 and $151.35.
  • The daily OBV did manage to hold its uptrend (line e), but the OBV has not yet made it above its WMA. Stronger OBV support can be found at line d.
  • The weekly OBV (not shown) did confirm the recent highs, and it’s well above its rising WMA. It will turn up with a higher close this week.
  • The first good support now sits at $146.35, with further levels in the $145.50 to $144.50 area

What It Means: My intermediate-term outlook for gold and silver has not changed from last week, but over the near term trading is likely to be treacherous.

The dollar looks ready to pull back and test its recent lows, and needs a move above the recent highs to complete a short-term bottom. No signs yet of a major low.

Crude oil can rally further—possibly to the $105.31 to $107.61 level—over the next week or so. If crude can hold the $98 to $100 level on the first setback, it could set the stage for a test of the highs.

Silver’s rebound is the most likely to stall, possibly by the end of the week; gold looks better technically, and could take out its all-time highs in the next few weeks.

How to Profit: Longs in GLD from early April at $140.92 were stopped out at $143.42, as I tightened my stop too much. No new recommendation for now, but I will favor buying on the next pullback as long as the volume patterns hold.

Should be 50% long SLV at $35.86 and 50% long at $34.64. I suggest using two different strategies, as I want to protect the quick profit and minimize the risk if we get a further decline.

On the 50% long position from $35.86, use a stop at $35.96 and sell at $38.76 or better. On the 50% long position from $34.64, use a stop at $32.46. On a move above $41.10, raise the stop to $37.82.

Editor's Note (11:30 AM, May 11): SLV traded to a low of $35.53 after this article went to press, although it has risen since then. My advice is the same: if long, exit half in lieu of the stop at $35.96. For the other 50% long position from $34.64, use a stop at $32.46, as stated above.

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