Bond downgrades on both Greece and Portugal sparked a sharp sell-off in the markets yesterday. The U.S. dollar rallied on renewed fear that Europe's debt crisis could be spreading. With the rise in the dollar, it might be expected that commodities would be under pressure, and in fact oil prices ended down on the day. However, gold did not drop - in fact it rallied on a possible flight to safety trade. Interestingly, silver prices held firm, despite not typically being associated with a flight to safety type rotation. We recently took a look at gold and gold miners as these assets traded near an important inflection point, but traders may also want to keep an eye on silver stocks for the promising pattern that's setting up there.
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In looking at silver, as represented by the iShares Silver Trust ETF (NYSE:SLV), you can see that the metal recently formed a trendline framing its recent correction. Silver was in a steady pattern of lower lows and lower highs until this important change of character. Notice how SLV formed a higher low in April, suggesting that buyers were willing to pay higher prices on its pullback. SLV then managed to set a higher high, completing the trend change from down to sideways. SLV is in the process of consolidating in a flag and the next move out of this range will be a pivotal one. A move under this range would hint at a continuation in the trading range that has been established over the past several months, while a move above would hint at a resumption of the bull trend in the metal. (For more, see A Beginner's Guide To Trading Precious Metals.)
Silver Wheaton (NYSE:SLW) is a silver miner that should benefit from the move in silver. In fact, SLW has been moving ahead of the metal, recently breaking out of a base it has been building for the past few months. SLW is also close to all-time highs, and a corresponding move in silver should act as a catalyst for pushing SLW through those highs. One level to watch would be the recent consolidation near $17 if SLW falls prey to the recent market weakness.
Coeur d'Alene Mines Corporation (NYSE:CDE) is a silver miner that has not been as strong as SLW, but could be close to a change in trend much like SLV. CDE has been in a correction for several months, as it held beneath its 50-day moving average on every rally attempt. It recently broke above this level, and is starting to consolidate sideways just under $18 per share. If CDE can clear this level, it would set a higher high in the process and signal a probable end to its correction.
Hecla Mining Company (NYSE:HL) is another silver stock that could be close to a reversal. In fact, HL has already been setting higher highs and lows for the past few weeks, but it is still beneath an important trendline and horizontal resistance. The $6.20 area was important support throughout late 2009 and it became resistance on a recent rally attempt in April. This would be the key area to watch for strength to be confirmed in HL.
Endeavor Silver Corporation (AMEX:EXK) is a silver miner that looks similar to HL and CDE. It has been attempting to build a small base after correcting from its early 2010 highs. It has respected the $3.75 area as resistance on a few rally attempts and this would be the clear level to watch. A move above this area would likely signal a test of the highs near $4.50 and possible a breakout above this level.
While it's quite possible that silver miners will be dragged lower through an extended market correction, it's interesting that they held up on average along with the metal on Tuesday's steep decline. The metal complex has been quietly showing strength and traders should watch these stocks for a possible reversal.
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At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.