Wednesday, July 29, 2009

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.


1 comment:

  1. For anyone whoe finds the UUP trade lackluster due to the low volatility and absolute return, then you could buy EUO instead which is an ultrashort Euro fund from Proshares which should have about 2x the volatility as UUP.