It's open season and time for the annual buck hunt! This is one of our favorite trades of the year. The "Buck Hunt" is a high-probability trade for a long term position that sets up every year on the US dollar. So get ready!

The beginning of January is an important time frame for the US dollar when the high or low for the year has often been established. Perhaps it's due to the fact that large traders and hedge funds are returning to the markets to begin a new trading year. Maybe it's 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. We don't really know for sure why it happens. But as market technicians, we don't need to know WHY the market is doing something, we just need to know WHAT it is doing. Our concern is in observing price behavior and trying to profit from it. Leave it to the academics and fundamental traders to conjure up the explanations behind the move. Perhaps the US dollar will decline in 2006 as the Fed's rate hike campaign is coming to an end. On the other hand, if Europe does not raise interest rates anymore (or if they cut rates) the greenback could stay strong as the premium on US rates attract investor's interest from around the globe. Could the US "twin deficits" command attention again and cause investors to flee US assets? Or will the US dollar be seen as a safe-haven as money flees western Europe if Germany follows thru on their brilliant idea to increase taxes during tough economic times? (Hmmm...sounds like history may be repeating itself. Didn't we see an increase in US taxes in the 1930's? And didn't some genius do the same thing in Japan in the early 1990's? The good news is that this policy is a sure-fire way to get out of a recession. The bad news is that it leads to an economic depression!) The fact is that nobody knows for sure what the future will be. All we can do is make projections based on probabilities. As technicians, we have an edge here. Our work is compiled by using data that is unbiased, historical fact. Here's our big observation:

Over the last twelve years, the US dollar index has made it's high or low for the entire year during the first full trading week of January nine times. That's accuracy of 75%! Odds like that are worth speculating on. According to "Random Walk" theory, this should not happen. If the markets are truly random then any given week out of the year has only a 1.9% chance of establishing the high or low for the year. (one week out of fifty-two). But facts always trump theory!

Here's how we chose to apply this information:

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 should liquidate half of the position at a 260 point profit as well. This locks 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.

Trade Suggestions:

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.

© 2006 Pearce Financial, LLC
Archived Editorials

CONTACT INFORMATION
Pearce Financial, LLC
(800) 800-1399
Email l Website

Futures trading involves risk and is not necessarily appropriate for all investors.
Notice & Disclaimer