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The Annual Buck Hunt
- Trade
Alert -
by Pearce
Financial, LLC
January 6, 2005,
published 01/10
It's open season again and time for the annual buck hunt! Don't worry, PETA members. We are not going to shoot Bambi. We are stalking the other "buck" - the US dollar. The beginning of the year is an important time frame for the US dollar when some very important highs or lows for the year have been established. A lot of times, it has actually been THE high or low for the year. Maybe it's due to the large traders and hedge funds returning to the markets. Or it could be due to the Fed setting the tone for the year's US interest rate policy at the first FOMC meeting within the first few weeks of the new year. Whatever the reason, it is definitely time to sit up and pay attention to this market. As market technicians, we don't really need to know WHY the market is doing something, we just need to know WHAT it is doing.
Since 1994, the US dollar index has made it's high or low for the year during the first full trading week of January about 73% of the time (eight out of eleven years). That's almost three out of four times! Odds like that are worth speculating on.
Our market bias is that the greenback is establishing it's low and is preparing for a bull run in 2005. There are a few reasons for this. First, the dollar is extremely oversold. It has lost about a third of it's value since January 2002. Second, it has reached a price level that has acted as good technical support in the past. When the US dollar index fell below the 81 cent mark in the past, it rallied several hundred points within weeks. Third, it's a good contrarian play. Bearish sentiment for the greenback is at record levels. Once all of the bearish news is finally factored into the dollar it could be supported by massive short-covering. Having stated all of that, this "system" calls for entering the market in the direction of the first break out. So if it breaks out to the down side first, a purely systematic trader would be obliged to trade the greenback on the short side. If a trader has our bullish bias, he would take only the long signal if it occurs and cancel the order if the sell signal occurs first.
Let's get down to the nitty-gritty mechanics of how we recommend trading the US dollar index at the beginning of every year.
First, we allow the buck to trade for the first full week of January to establish a price range.
Second, we place a buy stop above the first week's trading range and a sell stop below the first week's trading range. When one of the stops is elected it will initiate the entry into the market. The other stop will then become the protective stop for the position.
Third, once the trade has become favorable by at least 260 points, the protective stop is then moved to the original break out point to reduce the risk down to just the commissions and potential price slippage. Traders with multiple contracts are encouraged to liquidate part of the position at a 260 point profit as well. This will lock in a net profit on the trade.
That's all there is to it! Simple, but effective. As always, you should assess the risk on this trade and make sure it is compliant with your financial/emotional risk parameters before entering any trade. You may also want to consider using options in lieu of futures contracts on the US dollar index to further control your risk.
Disclaimer: There is risk of loss in all commodity trading. The data contained are believed to be reliable, but have not been independently verified by Pearce Financial. Accordingly, such data cannot be guaranteed as to reliability, accuracy, or completeness, and as such are subject to change without notice. Pearce Financial will not be responsible for any indirect, compensatory, or consequential damages, including loss of profits which may result from reliance on this data. Pearce Financial and/or its Principals and employees may or may not follow strictly any or all of the trading recommendations contained herein. The risk of trading futures and options can be substantial. Each investor must consider whether this is a suitable investment. Past performance is not indicative of future results.
© 2004
Pearce Financial, LLC
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