US Dollar Trade 08/16/2009

You'll find a few ideas on a possible US Dollar trade below, with references to a couple of choices for Stock Traders as well.

For weeks now, just about everyone I spoke to was talking about Inflation, and to buy Gold and Oil Stocks. I even pointed out to my Free Newsletter Subscribers that a company in Europe was putting Gold Vending machines in storefronts, like a candy machine.

I mentioned that a top must be near for this "mania" type of action to be taking place. Since then, Gold has moved a bit higher, but not making new highs at the same time the US Dollar was making new lows.

The first chart below provides some initial support for a possible US Dollar trade to the upside. Take a look:

US Dollar Trade 1

Taking a look at the chart back from November 2008-March 2009, you'll see that I added downward sloping trendlines on the RSI indicator as well as the MACD indicator, noted by the light blue lines. During the same period, the US Dollar made a new high near $89.50 in early March 2009, indicating a clear divergence between the price and the indicators used.

What happened after the divergence, was that the value of the US Dollar started a multi month decline to the recent August low shown.

In this case the price level was overbought as compared to the indicators, so a correction occurred causing the price to reverse from a high and move in the direction of the indicators.

Now take a look at the light blue upward sloping trendlines I have drawn on the same indicators between June 2009-August 2009. As the trend of both indicators has moved upward, the price (value) of the US Dollar has been declining. Another divergence, only this time in the opposite direction.

While using indicators are not 100% foolproof, they do work in many instances. In addition to the support I have shown here, current Elliott Wave analysis leads to the same possible conclusion as long as the most recent low holds as support..

As I mentioned though, any type of indicator or analysis is subject to revisions and should be monitored for possible changes. Consider following the forecasts for the US Dollar along with the major market indices by subscribing to the Elliott Wave Financial Forecast Service, by doing so you'll be informed of changes in forecasts as they occur.

Since most of my readers are Stock Traders, let's take a look at some ways to try and take advantage of a possible move higher in the US Dollar.

The next chart shows GLD which trades like a stock and tracks Gold prices less the cost of expenses for the trust which holds the Gold Bullion.

GLD Gold Trading

A potential exists for Gold to move lower if/as the price of the US Dollar moves higher. So one way to try and take advvantage of this would be to short GLD. You can see on the chart below that I have added a light green upper resistance line which should hold if a near term top is indeed in, or close to being in. Any move above this level would invalidate this trade and require a further analysis.

While Gold has not always moved inversely with the price of the US Dollar, if further Deflation is on the horizon as many do not expect, Gold should indeed drop in value as other commodities will also.

A second way to try and take advantage of this would be to buy DZZ, which is a double short inverse Gold fund. Take a look at the chart below:

DZZ 08/16/2009 Shorting Gold

I would say that with DZZ currently being at $20.48, and considering the chart only, using a stop loss just below $19.00 would be a good choice. This does not take into consideration your own trading plan nor position sizing so please make your own decision at to entering a trade like this and what stop loss level to use. Remember, although I try and do my best at all times I am wrong many times as well, and these are only my opinions not recommendations.

Another thing to notice on the chart of DZZ is that the same chart pattern coming off a low has occurred two other times during the time frame displayed as shown in the light blue ovals. Each of those times, the share price moved higher over the next several weeks. Using this as a basis for entry, $19.50 would have to hold.

Finally, taking a look at another option would be to consider buying UUP, which is a US Dollar Bull Index Fund. Take a look at the chart below:

UUP Dollar Bull Fund

I have added red support levels to the chart, one at $23.00 and one below that at around $22.50. If these levels are broken, then any bullish analysis would have to be reviewed.

Crude Oil may be another possible choice to consider trading short if a stronger US Dollar trade unfolds. As you may have noticed this past Friday, as the US Dollar gained strength, Crude Oil dropped from around $72.00+ a barrel down to the $68.00 level. If the US Dollar continues to move higher, Crude Oil may have further to go lower. The only thing to consider this time of year is it is currently Hurricane season, which could drive up Crude prices, at least temporarily.

Another problem (although only a possible temporary problem) I see is that I have read a few other articles about the US Dollar trade being to the upside now. Just as people were expecting a head and shoulders pattern in the DOW and S&P last month and it didn't breakdown, the more people who are expecting this to happen, may put some downward pressure for some sort of shakeout, or fakeout in the near term. So do some of your own research before making your own decision, and monitor your trades while using specific exit prices for stop losses, and stick to them.

Here is an updated page for the above post: US Dollar Trade Update 08/23/2009

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