Examining Pan American Silver Corp and Silver Wheaton Corp

12/16/2008 10:00 am EST

Focus: STOCKS

Nick Perry

Equity Options Trader, Schaeffer's Investment Research

Today we saw that the Amex Gold Bugs Index (HUI) was the top-performing area of the market. To get a feel for what is going on, I started looking at mining stocks and noticed that Silver Wheaton Corp (SLW) and Pan American Silver Corp (PAAS) were a couple of the stronger names. Here are some points to consider, starting with the daily charts.



Chart Courtesy of Thomson Financial

Right off the bat, there are three obvious points that stand out. The first is that both stocks appear to have transitioned from a downtrending mode to a basing pattern. The second point is that both are testing the top end of their recent ranges. The third is that each is showing a short-term overbought condition. In others words, we have a both encouraging and concerning points to consider.

On the upside, the transition into a basing period is usually a constructive sign after a downtrend. On the downside, the second two points suggest the stocks are overextended, at least on a short-term basis.

Digging into the sentiment profile, unfortunately, reveals a murky picture as well. A quick glance over the sentiment overview shows a mixed read at best. The one consistency, though, seems to be a lack of overt optimism from the Street.

Silver Wheaton Corp
Pan American Silver Corp

According to Zacks, 5 of 11 analysts (45%) rank Silver Wheaton with a "buy" rating. Meanwhile, only 3 of 7 analysts (43%) rank Pan American Silver with a "buy" rating. Given that both stocks are down sharply on the year, the contrarian implications of these opinions are somewhat mitigated. However, this does at least offer the opportunity for upgrades.

In my experience, analyst ratings are generally best used as an intermediate-term indicator. That, combined with the short-term overbought readings, leaves me with the idea that this isn't the best time to chase these stocks. The charts do suggest that the recent downtrends have been broken, but it may be best to wait for a pullback before jumping in.

By Nick Perry of Schaeffer’s Trading Floor Blog

Related Articles on STOCKS