Silver futures prices have been under significant pressure but have been unable to break through support levels despite a return of volatility which has eroded investor sentiment. Prior to the Federal Reserve meeting next week, silver investors are squaring a position, which is creating a consolidative tone throughout the capital markets. Implied volatility is in the middle of the 52-week range, but could represent an opportunity to take advantage of a silver price breakout or breakdown.
Silver futures prices have been trading at the low-end of the current range, testing support levels near 21.50 multiple times during the past week. Friday’s price action saw silver attempt to push higher, but it quickly ran into resistance levels near a downward sloping trend line near 2.70. Silver was unable to recapture the 10-day moving average near 22.09 and slipped down to 21.98 at the close on Friday.
Momentum on silver futures prices is nearly nonexistent with the MACD (moving average convergence divergence) index printing near the zero index level. The RSI (relative strength index) which is an oscillator that measure overbought and oversold levels is printing near 41 which is on the low-end of the neutral range.
Ahead of the FOMC meeting next week investors are unsure of where the Fed will take the markets. It is difficult for investors to gauge what the Fed is thinking given the recent slightly better than expected economic data. Although the Fed has told investors that rates will remain low for a considerable period of time, any tapering of the 85 billion in bond purchases will likely have a negative effect on riskier assets. Ahead of the Federal Reserve, there is a chance that an investor could purchase implied volatility on silver with the idea silver prices moving dramatically after the Fed announcement.
Implied volatility on the silver ETF (NYSE:SLV) is still relatively elevated and in the middle of a range encapsulated by the Bollinger band high (2-standard deviations from the 20-day moving average) and the Bollinger band low (2-standard deviations from the 20-day moving average). Although implied volatility is relatively high, it is still below the 20-day moving average and represents an opportunity to take advantage of potentially quick movements in the silver ETF.
At the current prices of 21.30, the 21 dollar SLV July 2013 straddles is printing near 1.65. This would create a breakeven price of 19.65 or 2.95 by expiration which is July 20, 2013. Option traders would be looking for the Silver market to breakout to the upside or break down, and move out of the current consolidative range seen over the past 10 weeks.
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