Silver stocks are back on track.
Last week, I gave you a list of my favourite silver producers. I wasn't ready to buy yet. It wasn't clear silver was ready to stop falling. But today, I think it's time to get back into silver stocks.
In my S&A Junior Resource Trader service, we use simple "guideposts" to tell us when to buy resource stocks. The principal guidepost is the 120-day moving average (DMA). A moving average collects prices from a period of time, then averages them out. It shows a "smoothed" version of the price trend.
There's nothing magical about using a 120-DMA, it's simply a good middle of the road gauge of a commodity's trend. And it allows us "get in" relatively early in an emerging price trend, while avoiding a lot of "whipsaws."
When a commodity is below its 120-DMA, we say it is not in a bull market. Since the underlying trend is such an important part of a commodity stock's returns, we don't buy stocks when their underlying commodity is trending lower.
When a commodity is above its 120-DMA, we say it's in a bull market. And we look to buy the best stocks in the sector.
So let's apply that to silver. Are we ready to buy here? Well, take a look at this chart:
This chart shows the silver price (in black) and silver's 120-DMA (in blue). As you can see, silver's recent fall was severe. The price dropped around 30%... but it didn't fall below its 120-DMA.
Silver is still in a bull market. And since it bounced so well off its 120-DMA, I'm ready to buy again.
One of the first places to start would be Silver Wheaton (TSX: T.SLW, Stock Forum). As I told you last week, Silver Wheaton doesn't operate mines. It invests in early-stage mining projects in return for a slice of future profits when a project starts producing. As silver prices soar, so do its profits.
Silver Wheaton took a beating from silver's decline. It fell 29%. But it looks like it has found a bottom and is climbing higher:
If silver continues to hold above its 120-DMA, Silver Wheaton could test its highs again. That's a 30% gain from here.
Silver's drop inspired a lot of queasy headlines. But it looks like it was just a normal bull-market correction.
It's time to buy silver stocks again.