US Dollar at Climax Point - Breaking Above Upper Trend Channels

Click on Chart of UUP to Enlarge

In a recent post I suggested that the US Dollar index may break above the upper boundary of a high-high trend line.  As of today it has done so on three separate high-high trend boundaries of increasing vertical angulation.

While it appears to me that some more sideways and slightly higher action would be ideal before a top, I view this at an ideal momentum point to exit longs.  This appears to be a climactic move.  I would suggest to keep a daily routine of analysis on commodities the trade inversely to the dollar for trade set-ups.  I follow gold, silver, and oil most closely, and so I am watching those on multiple time frames to potentially purchase at a trough on the chart that has the potential for a nice rebound.

Pete

A Few Loose Ends/Updates

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Last week I highlighted a possible bullish flag pattern in the US Dollar Index. Today's decline breaks that pattern. However, If the uptrend remains in force, then it should find support at the lower bollinger band where it is right now. Also, the RSI(5) is oversold and that will typically lead to a bounce in a nice trend. The recent move up in the US dollar has caused some early signs of excess speculation which is has led now to a pullback. In 2008 we saw a similar thing, which led to a sharp, brief pullback and then much more continuation of the uptrend. So my take is that this is a buying area for an uptrend continuation, but any substantial further declines from this point, could change my mind.

Click on Chart to Enlarge

About 3 weeks ago I highlighted the above ascending triangle in the QQQQ. It did break to the upside obviously. And so I wanted to just highlight where it is now. The pink lines show the widest leg of the triangle and that leg projected up from the breakout point. That is the first target, and it has been met and seems to be forming resistance around that level. The next target would be around where the move up from the end of the triangle equals the move up prior to the triangle.

If the uptrend is to remain intact in stocks, expect QQQQ to be able to hold above the breakout level as a support level. Another more subtle note is that the thrust out of a triangle like this will typically end a good bit before apex of the trendlines. The often there is a move back down to the breakout area within that apex time frame as well. That is still a week or more off yet, but at this point, I think that would be the most likely outcome. But there is options expiration this week also and that has bolstered stock consistently since the March lows.

If there is a late day sell-off today, the stock indexes could form solid bearish reversal candlesticks which may justify an earlier entry into an intermediate term inverse ETF trade, but it is too early to tell right now.

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