Stock Quotes in this Article: AG, EXK, HL, SLV, SVM, GPL

WINDERMERE, Fla. (Stockpickr) -- Is silver setting up for a huge snapback rally?

It very well  could be. Silver has stabilized after its 30% crash from recent highs of just under $50 an ounce, and it looks like the CME Group is done with raising margins on the shining speculative metal. The CME hiked margins four times in order to shake the hot money out of the silver market. Mission accomplished. Now this formerly red-hot trading vehicle is off the radar of many traders on Wall Street.

Selling euphoria and buying panic can be a successful strategy. The euphoria in silver was evident in the volume that came into the iShares Silver Trust (SLV) near the top. Volume clocked in at over 180 million shares a number of times when the SLV traded between $46 and $48 a share. That volume wasn’t just higher than normal; it was record-breaking by extreme amounts.

Strong volume is a great technical indicator when you see it early in a trend. It’s a major warning sign when you see extreme volume activity after something has run up big like the SLV did. If you look at the volume following the crash in the SLV, you’ll see that downside action also picked up dramatically, with a number of trading sessions registering between 180 million and 294 million shares. This extreme volume on the way down could mean that everyone who wanted out is out.

 

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    This now sets up silver for some short-covering profit-taking action. If you shorted the SLV near the top, you have some big profits that you might want to start locking in. Buyers could also easily move back into the precious metal now that the price has stabilized and volume has returned to more normal levels, which indicates all the hot money is gone.

    There are a number of ways to play a bounce in silver, including the SLV or the more-leveraged ProShares Ultra Silver ETF (AGQ). That said, the huge drop in silver has now created an even bigger buying opportunity in the silver mining stocks. Many of these names crashed hard as silver came down so fast. They now look poised for some big snapback rallies that could make traders some fast money.

    If you're looking to play silver here, make sure you’re watching the action in the U.S. dollar. If the dollar starts to rally again like it did recently, then a huge bounce back in silver might be put on hold.

    Here's a look at a number of silver mining stocks that could be poised to rebound big.

    Silvercorp Metals

    One silver miner that could be setting up perfectly for a big bounce is Silvercorp Metals (SVM), which engages in the acquisition, exploration, development and operation of silver mineral properties in China and Canada. This silver player is off to a slow start so far in 2011, with shares off by around 19%.

    If you take a look at the chart for Silvercorp Metals, you’ll see that the stock has potentially put in a double bottom chart pattern at around $9.60 a share. The last time the stock traded anywhere near this level was earlier this year when it hit $9.37 a share. What I like about SVM now is that it didn’t even test $9.37 on this pullback; instead, it found buyers at a higher price of $9.62. If this pattern holds, it will mean that SVM is forming higher lows when it pulls back on a longer-term view.

    This stock now looks like it could be setting up to break out of a clear downtrend pattern that started when silver collapsed. That downtrend took the stock from its 52-week high of $16.32 to under $10 a share. Shares of SVM have started to move above a key descending trend line that was acting as resistance the entire way down. Traders should look for confirmation of a new trend higher if SVM takes out some near-term resistance at around $10.40 a share and then $11.76 a share.

    One could be a buyer of this stock on any weakness and use a mental stop just below $9.62 to $9.37 a share. Look for strong volume to start coming into this name if it starts a run higher that’s well above the three-month average activity of 3.6 million shares. This could also be a great level to load up on some call options with a reasonable stop.

    First Majestic Silver

    Another silver miner that’s setting up for a possible powerful snapback rally is First Majestic Silver (AG), which engages in the production, development, exploration and acquisition of mineral properties, with a focus on silver in Mexico. This stock is solidly in an uptrend with shares up over 30% so far in 2011.

    If you take a look at the chart for First Majestic Silver, you’ll see that this day-trader favorite has already started to break out above a key descending trend line that has acted as resistance for the past two months. This is an extremely bullish change in trend for AG that you shouldn’t ignore, especially if you’re short this stock. You can also see on the chart how AG has made a key higher low in price after the stock crashed from its 52-week high of $26.88 to under $17 a share.

    This chart pattern of higher lows keeps a bullish trend intact for AG on a longer-term chart view. It would be even more bullish now if AG takes out its 50-day moving average of $20.16 on strong volume, since that higher low pattern remains in place.

    One could buy this stock on any weakness as and simply use that descending trend line as area to key off of for support. If it falls back below that trend line, then get out of the trade. If the stock finds support at that trend line if it pulls back that far, then stay with the trade. I would like to see strong volume that’s well above the three-month average activity of 2.1 million shares if this stock starts to take off and trade above some overhead resistance at around $19.19 to $20.20 a share.

    Endeavour Silver

    If you’re looking for a silver miner under $10, then Endeavour Silver (EXK) might be just the play for you. This Canadian mineral company is engaged in the evaluation, acquisition, exploration, development and exploitation of mineral properties. So far in 2011, the stock is up around 4.4%.

    If you take a look at the chart for Endeavour Silver, you’ll see that the stock has clearly started to break out above a key descending trend line that had been acting as resistance on the stock as shares fell from $12.35 to a recent low of $8 a share. You can also see that EXK has formed a pattern of higher lows on a longer-term chart view, and it’s making higher lows during the past couple of weeks. The move above that key descending trend line could mean that EXK is setting up for a big snapback rally.

    One could be a buyer of this stock on any weakness and use a mental stop just below $8 a share. It’s worth noting that volume on Tuesday clocked in at 4.4 million shares as the stock ran up 9.6%. That volume is bullish since it was greater than the three-month average volume of 3.9 million shares. If you get into this stock on weakness and it starts to trend up, add to your position if the volume is strong and it moves above the next significant overhead resistance level at $10.34 a share.

    Hecla Mining

    Another silver and gold miner under $10 a share that looks poised to rebound big is Hecla Mining (HL). This company is engaged in discovering, acquiring, developing, producing and marketing silver, gold, lead and zinc. This stock has been a big laagered so far in 2011, with shares off by around 27%.

    If you take a look at the chart for Hecla Mining, you’ll see that the stock might have just formed a major triple-bottom chart pattern at around $7.80 a share. This seems to be a huge support zone for the stock where buyers step in and gain control over the sellers each time it tests this level. Shares of Hecla are also starting to break out above a key descending trend line that had been acting as resistance for the stock for the past number of weeks. This could be confirming that the downtrend in HL is about to change rapidly.

    One could be a buyer of this stock right now and simply use a mental stop just below that triple-bottom price of $7.80 a share. You could also keep the stop tighter and just sell it if it trades back below that descending trend line. Consider it a bullish if that descending trend line turns into support in the near future. If you buy this stock and it starts uptrending, I would add to the position if it takes out the 200-day moving average at $8.39, and then add again above $8.82 a share which is right around the 50-day moving average.

    It’s worth noting that Hecla has a reasonable short interest. The current short interest as a percentage of the float for HL is 9% as of April 29. The short-sellers have also been increasing their bets on the stock from the last reporting period by around 4.8%, or by about 1.1 million shares.

    Great Panther Silver

    One more silver miner that looks set to bounce hard and could produce the biggest gains is Great Panther Silver (GPL), which, together with its subsidiaries, engages in the acquisition, exploration and development of precious and base metal properties in Mexico. The company primarily produces silver, and it also produces gold, lead and zinc properties.

    If you take a look at the chart for Great Panther Silver, you’ll see that this stock has been in a complete downtrend since it hit a 52-week high at $5.04 back in March. During that down move, the stock has been making lower highs and lower lows as shares fell all the way to a low of $2.52 a share. However, now the stock looks like it might be ready to break out of a near-term descending trend line that sits at around $3 a share. A move above that level with strong volume could signal that a change in trend is coming for GPL.

    It’s also worth noting that GPL has formed a longer-term chart pattern of higher lows as long as the stock holds above $2.50 a share. Because this is a more speculative penny silver stock, I would wait for GPL to take out $3 with volume that’s well above its three-month average activity of 4.2 million shares before buying. You could buy it on any weakness with a stop below $2.50, but I would only add aggressively once it took out $3.00.

    To see more silver miners that could be set to rebound, including Coeur d’Alene Mines (CDE), Silver Standard Resources (SSRI) and Pan American Silver (PAAS), check out the Silver Miners Poised to Rebound portfolio on Stockpickr.

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    At the time of publication, author had no positions in stocks mentioned.

    Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.