Sizing Up Silver During Fed Week

Net longs and short sellers have been reducing their exposure to SLV

Karee Venema
Jul 24, 2017 at 3:38 PM
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The Fed is set to kick off its two-day policy-setting meeting tomorrow. While no rate hike is expected to be announced on Wednesday, Wall Street is sure to mull over the Federal Open Market Committee's (FOMC) policy statement for clues to when the central bank plans on raising interest rates. And with several precious metals exchange-traded funds (ETFs) among the best ETFs to own during Fed week, it seems like a good time to check in on the iShares Silver Trust (SLV), as it tests a key technical level.

According to data from Schaeffer's Senior Quantitative Analyst Rocky White, SLV has had the best win rate among the sector ETFs we track during Fed weeks since 2015, ending the week positive 79% of the time and averaging a gain of 1.3%. More recently, SLV shares have been trading in a channel of lower highs and lows since April, and hit a 14-month low of $14.44 on July 10. SLV has since come off these lows to trade at $15.58 -- home to a 61.8% Fibonacci retracement of its 2016 rally, and area that supported the shares ahead of the Fed's December 2016 rate hike.

slv weekly chart july 24

Optimism on silver peaked in mid-April, but has since been declining. According to Commitments of Traders (CoT) data, last week marked a sixth straight week of distribution on silver, with net longs at the lowest level since July 28, 2015. This has coincided with a sharp drop in short interest on SLV, with the bearish bets down nearly 34% since the April 15 reporting period to 10.03 million shares -- the fewest since early February.

And while SLV open interest is docked in the low 6th annual percentile, with just 1.57 million contracts outstanding -- compared to its Oct. 21 52-week peak of 2.4 million contracts -- the tilt has been toward calls. In the front-month series, peak open interest of 32,639 contracts is found at the August 16 call, and data from Trade-Alert indicates significant buy-to-open activity here. If this is the case, the goal is for the shares to break out above $16 by options expiration at the close on Friday, Aug. 16. 

Now appears to be a prime time to purchase premium on SLV, too. The ETF's Schaeffer's Volatility Scorecard (SVS) is docked at a lofty 98, meaning the shares have tended to make outsized moves over the past year, relative to what the options market has priced in.

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