Video Updates - US Dollar and Equities

The videos cover the US Dollar and stocks. I used a video capture program that I haven't used before, and the video quality doesn't look that good, but Oh well.

During this bear market, the dollar has tended to turn up before equities top out, so even if the dollar has bottomed, there may be a period of a few weeks before stocks reach their peak.

My suspicion is that this week may see some sparks fly. There is an FOMC meeting I believe, and also there are multiple bond auctions yet again. Much of the Fed's game plan (assuming the goal is what we believe it to be - growth, economic expansion, etc) relies on keeping interest rates low, and conversely bond and treasury prices high. This is at the same time as the Treasury is flooding the market with auctions for treasuries securities to fund debt/federal obligations. So the Fed has to fight supply and demand as well - try to keep the prices up while supply is being driven up enormously. So the point is, that while these auctions have been occurring regularly recently, it is arguable that the most recent auctions have shown waning demand. This would result in buyers requiring higher yields on the debt they are buying (which would equate to a higher US dollar value and lower bond/treasury prices).

As another side note, the Equity P/C ratio came in very low at 0.49 Friday in conjunction with a spinning top candlestick and a gap up on monthly payroll data which has tended to result in give back of the gains over the next couple days. Readings that low in the P/C ratio have consistently led to negative next day returns. Also, this is basically the lowest reading of the bear market, so this may be an indication of maxing complacency. In addition the VIX has not confirmed the recent move to new highs in stocks, and several sectors did not confirm the indexes to new highs the last few days. So on at least a short-term basis there is divergence and complacency which I expect to lead to a decline larger than the miniscule ones since July 8th.

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

US Dollar (and Euro) Video Update

This video walks through possible price patterns that are forming in the US dollar and Euro, with the main focus on analysis of sentiment data related to the US dollar and Euro.

In sum, a strong case could be made for a dollar bottom (probably long-term) forming or already formed. If so that would almost certainly lead to lower commodity prices coming soon, and also that deflation is likely the coming economic reality, rather than inflation.....but only time will tell.

As the saying goes for deflation "Cash is King." This is said because the value of your cash/dollars are increasing, while almost every other asset class is declining in value. So for most investors, the best bet is to just hold on to cash, though speculators/traders would have ample opportunity to profit from shorter and intermediate term swings.

Pete