US Dollar Peaking?

RichardSchwartz — Tue, 17 Mar 2009 13:18:00 GMT

US Dollar’s Possible Turning Point. A Possible Trade For Traders? Written St. Patrick’s Day.

The US Dollar Index (symbol DXY) has fallen back just after breaking out above an old high. Hm, very interesting as some predict the US dollar weakening will be a first sign of normalcy coming back into the marketplace, that it will signal increased liquidity and a return to a bull market. We’ll find out whether these prognosticators are right or not and about the relationship between the buck and stocks over time.

Today though, this doubling back by the US dollar is a bad sign for continuing dollar strength This chart formation is what “Trader Vic” calls a 2B. That’s when a new high is set but quickly reversed. Let’s see, the DXY on March 2^nd closed above its prior closing high of 88.191 set back on November 21^st at 88.940 (Interesting. November 21 was almost exactly when the November to January stock market rally began.)

Anyway the US dollar index stayed up above that November high for seven days and then last Wednesday closed below that November close, at 87.868. Now, for the last four days, as stocks have risen, it’s stayed below its high and fallen further. “Trader Vic” in his first book, METHODS OF A WALL STREET MASTER wrote: “At major market turning points, long-term 2B’s, the new high or low will usually break within seven to ten days.” In this current case, the US dollar index fell back below its old high after seven days of being above its November high. That fits Vic’s time frame nicely. Let’s review a bit further back as well. This US dollar rally started last July 15^th or its run for eight months now. OK, could have run its course. The question is whether we have a “short the dollar play” here or not. For more evidence, let me go check another dollar index, Bloomberg symbol USTW$, the related, broader-based dollar index, which measures a much larger basket of currencies including a lot of developing market currencies. You may remember that most all currencies have been falling versus the dollar over the last year as the old rule has held up, “When America sneezes the rest of the world gets a cold.” Just meaning that tough times get real tough elsewhere when America stops buying; you can imagine the hardship this brings to other exporting countries, etc. Anyway, the broad based index has tracked the DXY pretty closely, moving higher since last July. It’s last high was 84.91 set back on November 21^st last year. Then on February 27^th, it closed higher, at 84.93. And stayed higher for the next ten trading days or until last Friday. Today it’s trading lower, at 84.628, as I write. So after ten days above its November high, it also has reversed lower or doubled back. Net, net, there does seem to me a trading opportunity. And in today’s modern age of investing we have vehicles to easily short the US dollar. In the ProFunds mutual fund family, there’s the ProFunds Falling US Dollar fund (FDPIX), in the Rydex family, there’s Rydex Weakening Dollar 2x Strategy Fund (RYWBX) and over in the ETF (exchange traded fund) market there is PowerShares DB US Dollar Index Bearish Fund (UDN). Obviously the ETF allows you greater liquidity because it trades like a stock, you can buy and/or sell it any day during the trading day.

SCHWARTZ RECOMMENDATION. Ok, after looking at the evidence let me recommend for an intermediate term trade going short the dollar using one of the three vehicles above. Do so in a very modest way and as just one of a variety of strategies. While keeping lots of cash on the sidelines. Also figure I’m wrong … and thus you need to sell to cover, if the DXY index again reverses upward and closes above its old high, higher than 89.105, your mental stop loss point. Your risk is about a point in UDN while the reward if the dollar has turned down from a major top is much larger. I like that risk vs. reward.

Disclaimer! I hold no positions in the three symbols above but can and do change positions without notice.

SCHWARTZ TIP: Finally, there are three very useful trading tips spelled out in Trader Vic Sperandeo’s two great, early 1990s published books: METHODS etc. and PRINCIPLES OF PROFESSIONAL SPECULATION. I’ve used them repeatedly over the last couple of years and they’ve proven reliable, not perfect but reliable. So I’d suggest any market follower needs to be aware of, knowledgeable about and applying all three in everyday activity. They are the two I refer to in today’s letter; the 2B Rule and the 4-Day Rule. The other is the “As easy as 1-2-3” change-of-trend rule. Actually there are more tips in his two books that are very useful too. But for any trader or speculator, spotting change of trends early on is very useful and profitable information. Get his books, know his rules. “Yay Trader Vic!”

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US Dollar Peaking?