May 10, 2012

Silver Wheaton Set To Rebound



With mounting concerns over global and especially Chinese growth precious metals price have corrected drastically. Since its 2011 peak at 174 GLD (gold trust) is now trading 11.5% lower, silver trust (SLV) lost 23%. Investor’s nervousness is pushing back metals prices, however this growing pessimism is actually growing opportunity.

Silver Wheaton Set To Rebound
Silver Wheaton Recent Turnpoints

One of the truly hard beaten victims of the commodity correction is SLW. The company has market cap of $9.5 billion, low debt level and is full of cash. The profit margins are 70%+. However those facts did not protect the shares from 36% plunge since its 2012 peak. Now SLW is trading close to 52 week low and seems to offer reasonable risk reward ratio.

Closer look at the chart shows some support for the above assumption. SLW just closed above two year support trend line determined by Dec 2011, Oct 2011 and Jan 2011 lows. Usually share price closing around this trend line has been followed by rally. Moreover in the case of Dec and June lows divergence (between the price trend and the Moving Average Convergence Divergence - MACD indicator) suggested the upcoming reversal.  Another point to consider is the price relative to its 200 day simple moving average. In the last three cases the price bottomed more than 20% before turned back. In addition both oscilator indicators Stochastic index and Relative Strength Index suggest the stock is oversold with reading under the 30 (reading above 70 indicates overbought level).
The combination of those signs let us assume that SLW correction is close to the end. Considering the worsened global growth outlook it is possible that price to consolidates for a while before starting the new rise.

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