Bill Baruch, president and founder of Blue Line Futures, reviews and previews the euro, Japanese yen...
3 Ways to Profit from a Dollar Rally
04/04/2012 11:40 am EST
Technical signals suggest the US dollar is close to making a significant turn, allowing traders and investors to use these ETFs to capitalize on the impending rally.
Bond yields rose again on Tuesday, and the technical action does favor higher rates over the short term, if not the intermediate term. As I noted last week, there are some key levels to watch that would signal that a major bottom in yields, or top in the bond market, is in place.
The technical action of the US dollar and euro-dollar futures suggests that the dollar is making a significant turn and could complete a major bottom formation in the next few months.
The long-dollar currency ETFs currently present some good risk/reward opportunities to benefit from a stronger dollar. Option traders could also consider bearish strategies on the largest long-euro ETF.
Chart Analysis: The weekly chart of the dollar index futures shows that the dollar pulled back from its weekly uptrend (line b) before turning higher on Tuesday.
- A strong move above major resistance in the $82.05 area will complete a significant bottom formation
- The dollar index made a high of 88.80 in 2010, and the major 61.8% Fibonacci retracement resistance stands at 82.70
- There is further resistance at 83.60
- The on-balance volume (OBV) broke its major downtrend, line c, last summer
- OBV is in a gradual uptrend from the November lows, line e. It needs to overcome resistance at line d to complete a bottom
The PowerShares DB US Dollar Index Bullish Fund (UUP) is designed to track the performance of being long the US dollar against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. It is very liquid and trades over four millions shares per day.
- UUP has corrected 3.5% from the January highs at $22.85 and now appears to be holding above the support at $21.74 and the late-February lows
- Daily OBV is still below its long-term downtrend, line h, but the volume action in the currency futures does support a stronger dollar
- There is next resistance in the $22.50 area. A move above $22.90 (line f) should signal a rally to the major 38.2% Fibonacci retracement resistance at $23.30
- The longer-term downtrend from the 2008 highs is now at $24.32
The CurrencyShares Euro Trust (FXE) made a low in January of $125.75 and came close to the 38.2% Fibonacci retracement resistance at $134.60 in February when it made a high of $134.26.
- The daily chart appears to show the formation of a bear flag (lines b and c) with trend line support now at $130.85
- A drop below the last swing low at $129.54 should confirm a resumption of the euro’s decline
- The measured targets from the flag formation are in the $125 area
- The 127.2% Fibonacci price projection target from the flag formation is at $123.40
- Daily OBV has broken its uptrend, line d, consistent with a further decline
The ProShares UltraShort Euro (EUO) seeks to provide the performance of twice (200%) the inverse daily performance of the US dollar price of the euro. It is also quite liquid, with an average daily volume of 2.7 million shares.
- In February, EUO tested the 50% retracement support level, which was calculated from the May 2011 low of $15.98
- There is next resistance at $19.90 (line f) with longer-term resistance, line e, in the $21.20 area. This also corresponds to the 59% retracement resistance
- The OBV has just broken its downtrend, line g, but volume needs to expand on a further rally
- There is minor support now at $18.85-$19
What It Means: Stocks are under pressure early Wednesday, which makes the close more important. A close in the Spyder Trust (SPY) below $140 is likely to signal a deeper correction.
Though a stronger dollar is having an initial negative impact on gold, a further decline is what I think is needed to complete a bottom in the gold market.
For investors, a small long position in UUP or EUO would be a good compliment to any balanced portfolio. Option traders should consider trading the downside in FXE.
How to Profit: For the PowerShares DB US Dollar Index Bullish Fund (UUP), go long at $21.98 or better with a stop at $21.32 (risk of approx. 3%).
For the ProShares UltraShort Euro (EUO), go long at $19.19 or better with a stop at $17.92 (risk of approx. 6.6%).
There is no official recommendation at this time, but the CurrencyShares Euro Trust (FXE) should drop down to $125-$126, if not $123-$124 over the next few months. A move above the 38.2% resistance at $134.60 would signal a further rally.
Related Articles on CURRENCIES
This is a market that isn’t impressed with talking but will pay attention to rates and oil. So...
The USD focus is on rates being higher and it’s just not mattering like it did earlier this ye...
The running of the bulls in equities (SPX) grabs headlines overnight with China up 2.5% leading the ...