The Return Of The US Dollar

This is my first post since my return from the Far East. Looks like the market still sitting around where it was 2 weeks ago before I left for the trip. The market did not experience any major changes in its technical. The DJI encountered resistance when it reached the weekly bull flag measured move level of 10,500, and the SP500 still unable to move to 1150 level. But the buzz in the market is beginning to change. As we’re all aware the recent rally is fueled by the weak dollar, causing oil, gold and equities to rise. This dollar carry trade has reached a point that is causing lot of anxieties for many traders due to the recent sign of the US dollar regaining some strength.

Since I am still in the process of getting myself back into the rhythm of the market, rather than repeating what I have posted 2 weeks ago, I decided to take this opportunity to talk about the US dollar and some of the dollar vs. other currency ETFs for possible trade opportunities and/or for monitoring the unwinding of the dollar carry trades that could signal the stock market reversal or next rally.

The following chart is the DXY, a US dollar index. Since late September, a divergence between the price and the MACD has developed, and recently price of this index broke above a downtrend resistance. These two technical observations presented a first sign that the US dollar could be reversing back toward the upside (strong US dollar).



Here is the chart of an ETF that track the US dollar, UUP. It too shows the same technical sign.



Here is an ETF that track the US dollar vs. the Euro. Look at the divergence it has developed between the price of the index and its MACD since late September, and the recent break down below the upward supporting trend line. This is another indication the dollar is strengthen.



Last chart is the dollar vs. the yen. This index has been trading within an upward price channel. It too appears to be heading back toward the upper price channel.



All these charts show the US dollar is gaining strength recently. If it continues to gain strength and move against the Euro and the Yen, the unwinding of the dollar carry trades can be vicious and volatile since the cheap dollar have created a very crowded one sided position, and when everyone is heading out the door, lot of people will be trampled on the unwinding. If one is looking for trading opportunities when the dollar carry trades are being unwound, consider these ETF that short the market index; DOG for shorting the DJI, SH for shorting the SP500, PSQ for shorting the Nasdaq 100, and the RWM for shorting the Russell 2000. I wouldn’t trade the ultra-short ETF (those 2X or 3X) of the respective market index due to the compounding effect. Stick with the 1X short ETF. Even if I’m not trading these short ETF, I will monitor these dollar/currency ETF for possible sign of the imminent dollar carry trade unwinding.