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U.S. Dollar Doom or Boom?, How to Trade the Dollar Through the Stock Market

Currencies / US Dollar Oct 05, 2009 - 12:52 AM GMT

By: Oakshire_Financial


Best Financial Markets Analysis ArticleEverywhere you turn, you hear pundits screaming that the U.S. dollar is ready to collapse and will be suitable only for confetti, wallpaper, and bird cage liner before you know it.

"Buy gold now before it's too late!" is heard from every goldbug and commodity investor on the planet.

Now... the U.S. Dollar certainly isn't the picture of health at the moment, but taking a one-eyed view to any investment is hardly a winning idea. To succeed in the markets, you need to be flexible and look at both sides of the picture.

A good measure of the dollar's true value is the U.S. Dollar Index: a weighted geometric measure of the value of the dollar against a basket of foreign currencies including the euro (EUR), Japanese yen (JPY), Pound sterling (GBP), Canadian dollar (CAD), Swedish krona (SEK) and Swiss franc (CHF).

Let's see how the U.S. Dollar Index looks right now on a weekly basis...

And here we see what appears to be an important bottom forming over the last two weeks at the 76 level. This has acted as support last October (despite the worst of the stock market selloff) and the two doji candles forming at the moment strongly indicate that a change in direction may be at hand.

From the MACD and Full Stochastics indicators, you can also see that the dollar is ripe for a bounce, although the optimum 'buy' signal would occur when MACD crosses over as it did way back in April 2008. The U.S. Dollar rose spectacularly from 72 to 88 over the next seven months.

Is Such A Rise About To Happen Again?

Well, nothing is for certain, but consider that everyone and his dog hates the dollar at the moment. It's all doom and gloom.

But... the dollar hasn't hit new lows, has it? That would indicate that everyone who want to go short, is already short. There's nobody left to push the dollar any lower.

And don't think that the Chinese government is about to sell all their dollars just out of spite. They're not stupid – killing the dollar while they're still holding lots of them simply isn't going to happen.

The Chinese are almost certain to continue diversifying out of the dollar, sure. But a lower dollar right now doesn't benefit them more than anyone else.

Therefore it seems likely that the path of least resistance for the dollar is up.

So how do we play that movement without getting into the futures market or the forex market?

You can buy the PowerShares DB US Dollar Index Bullish (UUP) on the NYSE, for starters. As you can see, this ETF mirrors the U.S. Dollar Index very closely.

Note the gap down a month ago. Gaps are always filled, it's just a matter of time. This gap should be filled sooner rather than later.

But if you're feeling more aggressive, there's another way to do this:

Buying the ProShares UltraShort Euro (EUO) ETF on the NYSE is also a possibility.

Being short the Euro hasn't been such a great idea until recently, as you can see by the result on this daily chart for EOU:

But it's beginning to look promising right now – do you see the MACD crossover that's just happened? Plus there's a gap waiting to be filled on this chart too.

A decline in the Euro against the Dollar will make EUO shoot up quite nicely.

How weak is the Euro in the forex markets right now?

Let's see with this weekly chart of the EURUSD forex rate...

There are a whole lot of things wrong with the Euro at the moment. For one thing, there's a double top and two reversal candles to go with it. The Euro looks poised to sink on that basis alone.

But compare the levels of A-B (the EURUSD price) and a-b (the extreme of the Stochastics oscillator tracking the price).

If you didn't already know, an excellent indicator of an imminent price reversal is when the price of an instrument makes a new high (or low) and the value of the stochastics oscillator peak (or valley) does not confirm it.

'B' is higher than 'A' but 'b' is not higher than 'a' as you can see.

The Euro is highly likely to descend from here and EUO is an easy way for you to play this without opening a futures trading account or a forex trading account.

Bearish USD Sentiment Is In A Frothy Bull Market

Remember when I mentioned that everyone hates the dollar right now?

When I did a Google search for "US dollar sentiment" , he results were very telling, with one item neutral, six bearish and only three of the top ten professing to be dollar bulls...

Moreover, the ones who are bulls aren't hyperventilating with joy, just hoping for a temporary bottom in the dollar bear market.

That's why I think the time for a contrarian "go long the dollar" trade is in the cards.

The U.S. economy may still not be going all that well, but the dollar is still viewed as amongst the least bad of the available currencies – only the Japanese Yen is stronger at the moment.

But even the Yen is forming a double bottom despite its great strength over the last several months (this means the Yen is about to weaken as this is a USDJPY chart – a rising USD means a rising chart price) ...

So despite what the media might be telling you about the collapse of the U.S. Dollar, the world is not about to come crashing down around your ears just yet.

In fact, the smart money is betting on a strong U.S. Dollar bounce in the very near future. It might not last that long, but a good indicator of when the glory run is over is when everyone is talking excitedly about the new U.S. Dollar bull market and how the crisis is over.

At that point it would make sense to go short once more, because there are still fundamental problems with the U.S. economy which have not yet been addressed.

But that's another topic for another day.

Until then, be a contrarian dollar bull.


    Nick Thomas
    Analyst, Oxbury Research

    Oxbury Research originally formed as an underground investment club, Oxbury Publishing is comprised of a wide variety of Wall Street professionals - from equity analysts to futures floor traders – all independent thinkers and all capital market veterans.

    Copyright © 2009 Oxbury Research - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

    Oxbury Research Archive

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