New UUP Trade

Click on Chart to Enlarge

The chart above is UUP which is a bullish US Dollar ETF. It is designed to track the performance of the USD Index and does so very closely.

In the last 2 months I have shown data and pattern possibilities on the USD/Euro relationship, and the take away message is that there is extreme bearish opinion on the USD with a corresponding major long term bullish reversal pattern that appears to be forming. I have been looking for a good opportunity to trade this for months, and I believe that the lowest risk relative to reward potential is occurring now.

The chart shows a wave 2-4 trendline, which when broken (assuming a 5 wave move is occurring) signifies the end of wave 5 in most cases. If price does not move up quickly or makes a new low, then there is a possibility that an ending diagonal is forming for wave 5 and would require a little patience and then re-entry. The blue rectangle/box indicates what needs to happen to confirm that the proposed scenario is indeed likely to be happening. UUP needs to rise to 24.10 or higher in the next 2 weeks (completely retrace wave 5 in less time than it took to form).

The 2-4 trendline has been broken today in conjunction with a recent slight undercut of the wave 3 low and reversal back above it. There are major bullish divergences on the technical indicators to go with everything else, so I really like the looks of this trade.

Now, since this is a currency ETF, the % moves will be small, but the point is that the reward relative to risk is huge. If the large scale pattern I have suggested is accurate, then price should move above 27.00 in the next 4-5 months, making greater than 10 to 1 reward on risk if entering now. You don't get those ratios too often on a trade, so I am going to suggest a trade on this for the blog.

Money Management

I would suggest risking up to 1% of trading account value for this trade. The caveat is that it would only take 1.3% decline in UUP to stop out the trade, so it would be possible to put about 66% of trading account value in this and still be risking only 1% of account if stopped out. I wouldn't suggest that because that ties up too much account on 1 trade idea. The volatility on this will be VERY low compared to the leveraged ETF trades I usually post. As a general guideline I would say that putting 20% of trading account (using the suggested stop loss) in this may be reasonable, but it will vary person to person. If you have a fixed $ amount or % of account that you usually devote to blog trades, you could just go with that amount or a bit more because the volatility will be so low on this comparatively.


Trade Action

Buy UUP today with a market order. Blog entry price is 23.67. Place a GTC sell stop order at 23.33 immediately after entry.


So just to quickly sum it up with an example, if your trading account is $10,000 and you devote 20% of your account ($2,000) to this trade, you will only lose 0.29% of your account value if stopped out of the trade. That is a tiny risk, however, there will be other trades in the future that will offer far greater absolute return potential, so I wouldn't tie up too much $ on this trade even though the risk to reward potential is outstanding.



Pete