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Can silver shine brighter than gold?

|Includes: Randgold Resources Limited (GOLD)

Traders returned from Easter weekend in a bullish mood, prompting the major indices to finally close at fresh 52-week highs, but lighter overall volume failed to confirm the breakout. The main stock market indexes opened higher, built on their early gains throughout the morning, then settled into a narrow, sideways range for the rest of the afternoon. The Nasdaq Composite advanced 1.1%, the S&P 500 0.8%, and the Dow Jones Industrial Average 0.4%. In yesterday's commentary, we suggested mid-caps could show relative strength in the event of a broad-based breakout. Along with small-caps, that was clearly the case; the Russell 2000 and S&P Midcap 400 indices jumped 2.0% and 1.6% respectively. Each of the major indices finished near its intraday high.

Obviously, it was positive that the broad-based indices broke out above their recent trading ranges to score new 52-week closing highs yesterday. However, it was negative that such a key breakout occurred on slower trade. Total volume in the NYSE was 2% lighter than the previous day's level, as turnover in the Nasdaq receded 11%. In both exchanges, volume also remained below 50-day average levels. Mutual funds, hedge funds, and other market-moving institutional players apparently remained on the sidelines yesterday, while retail investors drove the market higher. Although lighter volume breakouts should not necessarily be avoided altogether, rallies that lack the confirmation of institutional buying cannot be blindly trusted. As we typically see several times a year, lower volume gains can swiftly be erased by just one round of higher volume selling.

On April 1, both iShares Gold Trust (NYSEARCA:GLD) and iShares Silver Trust (NYSEARCA:SLV) gapped above resistance of their respective four-month downtrend lines. But between the two commodity ETFs, SLV is looking better and showing more relative strength. While GLD is still stuck in a sideways range of the past several months, SLV has broken out above its March highs. Below, the daily chart of SLV shows the recent breakout above its downtrend line:

SLV

At its current price, SLV may be too extended to achieve a positive reward-risk ratio for new position entry. However, a pullback to new support of the prior downtrend line would provide an ideal, low-risk buy point into SLV. As such, we'll be monitoring the price action of SLV in the coming days for a retracement to support of the breakout, around the $17.25 to $17.30 area. To clearly illustrate the relative strength SLV is now showing to GLD, take a look at the "percentage change" chart that compares the relative price action of both ETFs over the past thirty days:

SLV2

On the chart above, notice that SLV has rallied 14% over the past thirty days, while GLD has gained just 2.5% during the same period. More importantly, the overlay shows how SLV has just broken out above horizontal price resistance of its March highs, but GLD remains stuck in a sideways range. This chart confirms the relative strength of SLV over GLD, as well as the better pattern in SLV. Therefore, if the precious metals pull back to provide an entry point in the near-term, silver may actually shine better than gold. Because commodities often move inversely to the price of the U.S. dollar, one potential caveat to buying SLV is the recent strength of the U.S. Dollar Bull Index (NYSEARCA:UUP). Nevertheless, there have been numerous market cycles where both precious metals and the U.S. dollar simultaneously show strength. Yesterday, for example, UUP, GLD, and SLV all moved higher.

A spike the 10-year yield caused treasury bonds to plunge yesterday, causing many fixed-income ETFs to slice through critical levels of support. The iShares 20+ Year T-Bond (NYSEARCA:TLT) was one such example. As shown on the weekly chart below, TLT plummeted to a new multi-year low yesterday:

TLT

As TLT lost 1.7%, our position in the inversely correlated ProShares UltraShort 20+ Year Treasury (NYSEARCA:TBT) rallied 3.1%. However, because "short" ETFs use a daily rebalancing of their portfolio of derivatives to achieve their pricing, they typically underperform their underlying index -- only marginally in the short-term, but much more over the long-term. As such, we are simply following the chart pattern of TLT, rather than basing our technical analysis directly on the chart of TBT. Ideally, selling short TLT is probably better than buying TBT. Still, through buying TBT, traders with non-marginable cash accounts (such as an IRA) can still take a bearish position on the price of long-term treasuries (which is essentially a bullish stance on interest rates). If yesterday's bond market action was any indication, traders may be expecting the Fed to finally bump up the Fed Funds Rate in the near future.

Presently, we have five open positions in our model ETF portfolio. Yesterday, all five moved in our favor, and only one of the positions is presently showing a loss, albeit a rather small one. We'll conclude today's Wagner Daily with a concise update on each one below;

  • FXI - Showing an unrealized gain of 6% since our March 26 entry. Acting very well, but may take a rest upon testing resistance of its January 2010 high.
  • UUP - Has pulled back to support of its 20-day EMA and February breakout level. Still showing a decent unrealized gain, but needs to hold above the 50-day MA.
  • TBT - Discussed in detail above, this ETF moved into the plus column with yesterday's breakout. Basing trading decisions on TLT chart.
  • IAI - Our April 1 entry working out so far, and we anticipate further sector rotation into the broker-dealer sector. Watch the chart of GS as a leading trend indicator.
  • BRF - We are short BRF due to its intermediate-term relative weakness. While most international ETFs went up yesterday, BRF moved lower, so it's still weak.
Open ETF positions:

Long - FXI, UUP, IAI
Short (including inversely correlated "short ETFs") - TBT, BRF
The commentary above is an abbreviated version of a daily ETF trading newsletter, The Wagner Daily. Regular subscribers receive daily updates on all open positions, as well as new ETF trade setups with detailed trigger, stop, and target prices. Intraday Trade Alerts are also sent via e-mail and/or text message, on as-needed basis. For your free 1-month trial to the full version of The Wagner Daily, or to learn about our other services, please visit morpheustrading.com.

Deron Wagner is the Founder and Head Portfolio Manager of Morpheus Trading Group, a capital management and trader education firm launched in 2001. Wagner is the author of the best-selling book, Trading ETFs: Gaining An Edge With Technical Analysis (Bloomberg Press, August 2008), and also appears in the popular DVD video, Sector Trading Strategies (Marketplace Books, June 2002). He is also co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. Wagner is a frequent guest speaker at various trading and financial conferences around the world, and can be reached by sending e-mail to deron@morpheustrading.com.



DISCLAIMER: There is a risk for substantial losses trading securities and commodities. This material is for information purposes only and should not be construed as an offer or solicitation of an offer to buy or sell any securities. Morpheus Trading, LLC (hereinafter "The Company") is not a licensed broker, broker-dealer, market maker, investment banker, investment advisor, analyst or underwriter. This discussion contains forward-looking statements that involve risks and uncertainties. A stock's actual results could differ materially from descriptions given. The companies discussed in this report have not approved any statements made by The Company. Please consult a broker or financial planner before purchasing or selling any securities discussed in The Wagner Daily (hereinafter "The Newsletter"). The Company has not been compensated by any of the companies listed herein, or by their affiliates, agents, officers or employees for the preparation and distribution of any materials in The Newsletter. The Company and/or its affiliates, officers, directors and employees may or may not buy, sell or have positions in the securities discussed in The Newsletter and may profit in the event the shares of the companies discussed in The Newsletter rise or fall in value. Past performance never guarantees future results.

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Disclosure: Long TBT, UUP, FXI, IAI Short BRF