Flash Alert - April 28, 2011

Alert: Silver Bounces Back (Too) Fast toward Record Highs

Speculative traders consider going “short” silver by placing an order to buy shares of ZSL immediately.

I devoted a lot of words to silver in this week’s issue of Commodities Essential. I said I expected a correction could reach down to $40 or so. The high point on Monday to the low point on Tuesday spanned a range of $4.34, or 8%. Today silver is up $3.31 per ounce at time of writing, or more than 7%.

Granted the Federal Reserve gave little, if any, indication yesterday that it would abandon easy monetary policy any time in the foreseeable future, but silver is behaving as if investors are scared to miss out on further upside. Such a “can’t afford to miss out” mentality usually equates to a “too good to be true” outcome.

To me, the potential reward in the near-term does not warrant the risk of being long at these levels. Further, I think the upside could be rather limited in the near-term. Traders are very likely gunning for silver’s all-time high at $50.53 (last price $49.12.) Once that level is hit I think we’ll see some spec money come off the table and send silver sharply lower.

That’s why I recommend active traders jump in here with ZSL (ProShares UltraShort Silver ETF) to target potential downside over the next few days.


 Trade Essentials.

ZSL is a 2x-leverage ETF that provides exposure to potential downside in silver prices. Here are the recommendation specifics:

ZSL (Last Price: $13.05)

  •  Buy shares of ProShares UltraShort Silver ETF, symbol ZSL, at the market. Then place an order to sell all shares of ProShares UltraShort Silver, symbol ZSL, at $12.30, STOP. Both of these orders are good till cancelled.

  •  Note about the stop-loss: considering the bubblicious nature of this silver move, I do not recommend risking too much on this position - either we get this pullback very soon or we get out.

 Again, this trade is looking for a short-term top in silver and an abrupt change in short-term investor sentiment. Be mindful of the risk.