Friday, May 6, 2011

Don't fear the pullback.

"Silver is crashing!" You can hear it all over the blogosphere. The market is ridden with fear that the silver bubble has popped. It has not. This is a follow up to my recent article titled "Buy Precious Metals on a Pullback to Profit From the Greatest Transfer of Wealth In History." The pullback is here!

The poor man's gold has pulled back as much as 25% off its high of 49.82 according to the silver futures chart. This is what we should see as a healthy correction given its parabolic rise since January of this year. The selling as of late seems incessant as sellers push the metal below the 50-day moving average on heavy volume as we write this article.

Bargain hunters: This is your opportunity. Stocks like First Majestic Silver Corp. (AG), Silver Wheaton Corp. (SLW), iShares Silver Trust ETF SLV, and ProShares Ultra Silver ETF AGQ look cheap here. AGQ is not for the faint of heart, as its underlying asset is the silver futures and the leverage runs fast enough to make you queasy. The darlings of the silver miners, however, you can sweep up for a huge discount.

The world's richest man, Mr. Carlos Slim, was featured on CNBC yesterday in a segment in which it was disclosed he has been a seller of silver futures for the last few weeks since April. Link to CNBC

"Silver is crashing!" You can hear it all over the blogosphere. The market is ridden with fear that the silver bubble has popped. It has not. This is a follow up to my recent article titled "Buy Precious Metals on a Pullback to Profit From the Greatest Transfer of Wealth In History." The pullback is here!


The poor man's gold has pulled back as much as 25% off its high of 49.82 according to the silver futures chart. This is what we should see as a healthy correction given its parabolic rise since January of this year. The selling as of late seems incessant as sellers push the metal below the 50-day moving average on heavy volume as we write this article.

Bargain hunters: This is your opportunity. Stocks like First Majestic Silver Corp. (AG), Silver Wheaton Corp. (SLW), iShares Silver Trust ETF SLV, and ProShares Ultra Silver ETF AGQ look cheap here. AGQ is not for the faint of heart, as its underlying asset is the silver futures and the leverage runs fast enough to make you queasy. The darlings of the silver miners, however, you can sweep up for a huge discount.

The world's richest man, Mr. Carlos Slim, was featured on CNBC yesterday in a segment in which it was disclosed he has been a seller of silver futures for the last few weeks since April.

This is NOT bearish in my opinion. You may think, "Why would the world's richest man sell silver futures if he's not bearish on the metal?". This is not bearish my friends because he is hedging this position for a far bigger trade: Slim owns a Mexican mining company called Minera Frisco. This is a major silver and gold producer that produced 200,000 ounces of gold, and 5.5M ounces of silver last year! In 2011, he plans to quadruple silver production to 19.1M ounce.!

Still think he's bearish on silver? I think not.

This pullback is a gift, and he knows it. In fact, he could be contributing to the decline, on top of the CME's recent margin hikes representing a greater than 30% cost to margin a silver futures position.

I've thrown in quite a few "stink bids" that landed on SLW ($38), EXK ($10.00), AGQ ($240) that have landed in the past few days, without committing my entire capital.

The Relative Strength Index (RSI) is reaching oversold territory on silver, and the oscillators still show that silver can decline on a daily chart. However, silver put in a double bottom formation yesterday in one of the charts I outlined below that looks promising. I caught that bottom, and I'm holding on willing to add on more weakness.

Here are the charts and some silver option plays worth considering. I suggest entering the miner shares at current prices, but the options should be added only to augment your position and increase your gains.

The Silver Futures Chart. The yellow oval is the first majro stop for the buy-point. Silver showed a lot of support yesterday at this area. It has broken an uptrend line, though there are support shelves around 36 and 33. It is currently at the 50% fibonacci retracement level of 37.80 as I write this.



Here is a current chart of the USD under $DXY. The dollar is bouncing today, contributing to the broad decline in commodities. I expect it to follow and stay within the fib fans, but I expect retracements and not a straight line down to test the 71 level.




First Majestic looks battered and bruised. This looks like a good place to pick up cheap shares. I'll admit I was a little early on AG at the $20 mark because a former price level looked to be showing solid support. It broke through and is looking to fill the gap around $16. Note that it has bounced before at the fibonnaci fanline. This area should show some support. As one of the purest silver miners out there (93% revenue from silver production), with a cost of production per ounce of $7.94, I'm willing to add onto dips and hold this longer-term.



SLW is showing some resilience, finally! I added to my position at $38, and will ad more on a dip below to $33. Here's a chart right around the 200-D EMA. SLW is a buy at the 200-Day EMA, in fact i would scale in a current levels since we're at the 61.8% retracement of the move up since January.



Here's another SLW chart worth noting, showing fibonacci trendlines that are actually also existing trendlines in the chart that occured naturally. SLW is showing strength here relative to the decline in the metal.



Endeavor Silver Corp. (EXK) is another silver miner, like AG. Although they are a silver player, this is a growth play in which they have proven reserves and are planning on more than doubling silver production over the next couple of years. EXK is not as well known but is starting to catch a lot of eyes on the street. As we write, EXK is currently under the 50-Day EMA.



Here is my preferred option play on SLW. The $30 in-the-money calls September contract is trading at 8.60 on the bid. Currently SLW is trading at $37. This represents $1.60 in theta or time value, out to September. This is relatively cheap considering September is 5 months away. In-the-money options provide great leverage with less risk because they already have intrinsic value. The $30 calls already have $7 per contract of value. Should SLW rise, you will gain $100 per every dollar SLW rises on each contract. Should SLW fall, the time value will remain on the call option. The $30 strikes are cheap given the drop in the implied volatility and the selling occuring in the silver markets.

Thursday, May 5, 2011

Why are commodities getting whacked? Here's why...

Dollar has been on a steady decline all year. This bounce appears as the dollar is trying to base. The market does not always trade inverse to the dollar and it gets decoupled from time to time. Currently, this is how the money flows are operating.

Quick Update on DNDN

DNDN has been dragged down by the market. DNDN is showign nice support at the 50-Day EMA. This is a great place to add positions. It broke through the S/R line, and the bullish flag formation hadn't panned out.

However, DNDN is an intermediate term play. Earnings and positive news on Provenge facilities should have been a nice catalyst. I do believe DNDN should hold here, as the selling is attributed to the overall selloff in the broad markets. The current selling, does not appear to be with conviction.

Wednesday, May 4, 2011

Quick Update on Silver

Quick Update on Silver Futures

Those who are wary on the silver drop, it looks like on an hourly and 4hourly chart silver futures are trying to put in a double bottom. the action around the 50-day EMA is certainly a battle and bulls are looking to hold.

It should bounce here, but it's not out of the woods yet. It could still be a retrace of the move down. I wouldn't get too confident unless it can retrace at LEAST 50% of the move down today. The double bottom-pin looking convincing so far. Let's see if it holds.

RSI and MACD are starting to curl up from oversold levels enforcing the bounce.

Stocks like AG and SLW are looking to be extremely attractive. AG is bouncing off a fibonacci fanline that's holding pretty well.

Sunday, May 1, 2011

Biotech Superstar: Dendreon Corporation (DNDN)

DNDN has one of the most beautiful setups I've seen in the biotech sector. A recent move by VRTX was one that I missed, but IMO DNDN has far greater potential and the cleanest trade setup I've seen in awhile. I  outlined the details in the charts below which I'll discuss in a moment, but what's better than a beautiful chart setup?


The fact that there's 4 major investors (billionaires) that are backing your trade. Here's who owns what in DNDN:


Ken Griffin of Citadel Advisors - $15,000,000 of DNDN shares.
Steve Cohen of SAC Capital - 1 Million shares of DNDN acquired last quarter of 2010.
George Soros - 4 Million shares of DNDN.
David Shaw of DE Shaw - 1,300,000 shares of DNDN.


Even if we can't track exactly when and what price, the third chart below clearly shows volume accompanied accumulation over the last year. I circled the volume bars in the yellow ovals.


Here's a link to a recent Forbes article publishing the above investors' holdings.
http://blogs.forbes.com/jamesaltucher/2011/04/05/4-billionaires-buying-shares-of-dendreon/


As far as recent events are concerned, as most of us know, DNDN received FDA approval for late stage prostate cancer treatment, causing the initial meteoric rise. Another notable recent event is the approval of Medicare to sponsor the expensive $93,000 treatment. I'm more into DNDN currently for the technical setup, but nonetheless it's still important to know the basic fundamentals:

Analyst Consensus for revenues & sales are as follows:
Consensus estimates for DNDN revenues grow from $370M 
in 2011 to $1,883M in 2014 (2011-2014 CAGR: 72%) and $2,331M in 2015 (2011-2014 
CAGR: 58%). It is also expected to have 2.3B in revenues in 2015.

Onto the charts... 

The first chart is my favorite. When JNJ/VRTX announced their competition drug approval, DNDN tanked around 15% after hours. This was a an impulsive-shock type of move as someone panicked and let go shares for cheap. When DNDN opened the very next day, it quickly shrugged off the news like JNJ/VRTX are not even in the picture. In other words, the market doesn't consider their drug as a threat to Provenge.





This second chart shows a pretty little bull flag, that should deliver a 12 point move, once it breaks overhead resistance 
between 44 and 45.




This third chart is the most informative, describing events and price movements over the past year. Notable are the near-cross about to occur on the 50/200-SMA. The blue rectangle indicates the consolidation and accumulation range that big buyers have been acquiring over the past year. The volume bars below are respective of the moves on the big green candles and gaps up. We also have a decisive break on the descending trendline. I do see signs that DNDN has been kept within this trading range as big money has accumulated. Upcoming earnings are the perfect catalyst to propel DNDN out of its current bullish formations






I own DNDN since $36 and $37, where it confirmed the breakout from the year-long descending trendline and crossed over it's 50-SMA. Notice if you view the May options chains, that the open interest is owned in high volumes all the way up to the $50 strike. What's interesting is the activity on the $45 strike, where Friday's volume was nearly 50% of the current open interest. Similar activity is noticeable in the later dated contracts, especially the August contracts. I personally own Aug 45 calls, as well as the shares. The options I'm holding are currently a double from where I've held them. In my opinion, since options have a clearly defined risk, that is the best way to play DNDN, since you can only lose your committed capital. I own the shares, too but I'm prepared to let those go with a tight stop if things turned south quickly. This does not eliminate the risk of a gap down.

Best of luck to all. If you found this information informative or have any suggestions, please join us for discussion in the comments below. 
Disclaimer: All content within this site is solely the opinion of the author and does not constitute investment advice. Trade at your own risk.