Same Old Game

This is the same old game being played over and over again. Whenever a market gets too speculative (one sided), the margin is raised to take out the excess. This is exactly what has happened to the silver market this week. The CME increased the margin and triggered a sell off on silver. This in turn triggers a sell off on the silver ETF, SLV. As the price continue to fall, it triggers more margin call selling, and that forces liquidation to take place on other assets to cover margin call and losses.

Since the price of silver has fallen, the SLV has fallen more than 20% in less than a week from a high of 48.35 on 4/28/11 to today’s intraday low of 38.01. Now that silver has dropped more than 20%, what's next?

Looking at the price chart of SLV, there could be an oversold bounce when it hit a potential support near 37. This is a previous resistance level when SLV was on the way up, and it is also near the 50% Fibonacci retracement level between the 4/28/11 high and the 1/25/11 low. Furthermore, the price is near the 50 SMA and when it moves below the 50 SMA, a test on moving back above this moving average is not unusual. The bottom line is, it’s a bit late to initiate new shorts, and too risky to go long. I would watch for a bounce back up to the 40 level and see how the price holds up, then I will look for long or short entry.