Silver Futures Slide As 'Weak Longs' Pushed Out Of Market; Sell Stops Triggered

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02 May 2011, 10:38 a.m.
By Allen Sykora
Of Kitco News
http://www.kitco.com/

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(Kitco News) - Analysts are describing weakness in silver futures so far Monday as long liquidation that has removed some of the recent speculative froth from the market, encouraged in large part by two silver margin hikes by CME Group last week.

The decline was accelerated by sell stops, which are pre-placed orders triggered when certain chart points are hit. Some note the swift decline occurred prior to news about the death of Osama bin Laden, the longtime leader of al Qaeda, although this subsequently added to the bearish tone of the metal.

At 10 a.m. EDT, July silver futures were $2.599 lower at $46 per ounce on the Comex division of the New York Mercantile Exchange. They bottomed overnight at $42.20, which at the time represented a decline of 13% from Friday’s close.

Several metals analysts said liquidation was encouraged by recent margin hikes by CME Group. The most recent went into effect after the close of business Friday. The exchange hiked not only margins for silver but also cocoa, coffee and ethanol, but lowered margins for a number of other products, citing “a normal review of market volatility to ensure adequate collateral coverage.”

Previously, there was a “huge speculative excess” building in the silver market, particularly from smaller traders, said Mike Zarembski, senior commodities analyst with optionsXpress. “With the CME raising margin requirements…this market has become very pricy to hold positions,” Zarembski said.

This forced a “lot of weak longs” out of the market as sell stops were triggered when the market fell through the 20- and 10-day moving averages, said Charles Nedoss, senior market strategist with Olympus Futures. So-called “weak” positions are those that are not in the money by far, with traders often choosing to exit quickly rather than put up additional money via margin calls when the market moves against them.
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