Last Wed we noted numerous stars aligning for a Tradeable long position in Silver. All we needed was a rally above 16.15 and we'd be off to the races. (please read last weeks Silver commentary for full explanation). Almost on que the Banksters proceeded to bomb Silver (during the most illiquid trading hours of course) and instead of a rally we got another wave down to 14.32.
It appears this was even too much for the "asleep at the wheel" regulators @ the CFTC, and they've since proceeded to invalidate the low tick in the 14s & instead now $15.11 is the new low.. I'm sure all of the Silver Producers and Miners sent them a Thank You letter for this.
All in one scam, traders were able to re-enforce 3 very important principals which if followed, would have enabled them to duck this latest haymaker:
1 - Always wait for confirmation on a reversal before trying to catch a falling knife - Our 16.15 levels were never hit so no trade was initiated. 2 - Never leave stop losses in the Market for your opponents to see - Their favorite hunting time is when you are trying to have dinner with the kids, or perhaps looking for some hanky panky with the old lady. 3 - Never Go Long or Short futures without a hedge in place, unless you are very well capitalized & can eat 10-20k drawdowns like they are a sugary topping on your morning corn flakes.
Now that this reflective moment is out of the way, lets update the prospects for this trade.
1 - The latest COT report showed a Net Commercial Score of 88% as the Commercial traders bot another 11k contracts into the $16.04 price as of last Tuesday. And if they were doing this @ the $16.04 levels, what do you think they were doing on the drop to $14.30?
2 - More interestingly, is the Swap Dealer position which sat @ net short 125 contracts only. This means last weeks flash crash brought them to a Net Long position. This is a significant tell, because the Swap Dealers are almost ALWAYS short precious metals. The last time we saw the Swap Dealers net long was in the Summer of 2015 right around this price level of $14.75. Price then proceeded to rally $2 over the next 20 trading days.
3 - We are seeing buyers stepping in now at these levels. with Long Legged Dojis forming on both the Daily & Weekly Charts - So there is definitely indecision/stalemate at these levels.
Last week we wanted to wait for confirmation, but this latest gift is offering us a amazing opportunity to position for the coming bounce and we are no longer waiting. We are doing our Christmas Shopping Now. Here are the actions to take.
1) Go long 1 Dec Future @ current levels - $15.60 2) Buy the Nov 27 $15.50 put for approx .73 3) Sell the Nov 27 $14 put for approx .21 4) Sell the Nov 27 $17 call for .38
The cost of the put spread net of the proceeds from the short call is approx 14cents. You also have 10cents downside on the Future for total risk of 24cents.
Your upside is up to $17 or $1.40 minus cost of the hedge = $1.16
This gives us a R/R of 4.8-1, and we have 140days for this trade to work.
Finally might we suggest a trip down to your local coin dealer to pick up some phizz at these gift prices. Proceed to buy more every 10% lower from here.