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Special Report - The
Annual Buck Hunt (US Dollar Index Trade)
Everybody put on your camouflage trading
jackets! The beginning of January is open season on the US dollar index
and time for the annual buck hunt! This is one of our favorite trades of
the year as it has become a tradition at Pearce Financial. In short, the
"Buck Hunt" is a high-probability trade for a long term
position in the US dollar. The parameters for the trade is set up in the
first few trading days of January every year.
The beginning of January is an important
time frame for the US dollar. Most of the time, the high or low for the
entire year is established in this time window. 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. Anything could happen now: Maybe the
greenback will decline in 2007 as the Fed's rate hike campaign is most
likely behind us and Europe is still raising their rates...or maybe the
greenback will rally on renewed confidence in the US due to the shift of
power going to the Democrats. Perhaps the buck will soar as record highs
in the stock market attract global investment capital and create a
demand for US dollars...or will the US "twin deficits" command
attention again and cause investors to flee US assets? Will the war in
the Middle East finally come to a close or will it get even worse? Even
if we had the answer to this question, how do we know what the effect
will be on the US dollar? The fact of the matter is that nobody has a
clue what the future will be. Therefore, the best that 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 twenty-one years, the US
dollar index has established a major high or low - quite often the high
or low for the entire year! - during the first eight trading days of
January. The numbers are
astounding: During eleven of the last twenty-one years (52%), the high
or low for the entire year was made within the first two trading days of
January. During fourteen of the last twenty-one years (almost 67%), the
high or low for the entire year was made within the first eight trading
days of January. During fifteen of the last twenty-one years (71%), the
high or low for the first half of the year was made within the first
eight trading days of January. During seventeen of the last twenty-one
years (81%), the high or low for the first quarter of the year was made
within the first eight trading days of January. Odds like that are worth
speculating on. According to "Random Walk" theory, this should
not happen. If the markets are truly random, then the first two trading
days out of roughly 250 trading days for the year has less than
one-tenth of a percent chance of establishing the high or low for the
year...yet it has been 52% for two decades! And the odds of the high or
low for the first half of the trading year being established in the
first eight trading days are roughly 8 out of 125 or just over six
percent...yet it has been about 71% for twenty-one years. Fortunately
for us technicians, facts always trump theories.
Here's how we will use this data for the
trading strategy:
First,
we will allow the buck to trade for the first eight trading days of
January to establish a price range.
Second,
we will "bracket" the US dollar index by placing a buy stop
above the highest high of the first eight trading days and a sell stop
below the lowest low of the first eight trading days. When one of the
stops is elected it will initiate the entry into the market. The other
stop will then become the initial 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 entry stop order price 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.
Fourth,
if we continue to ride this trade all year without getting stopped out,
we will exit the position during the last trading week of the year to
complete the trade. Then we will simply wait for the new trade
parameters for the next year.
Aggressive traders willing to trade on
lower odds for bigger returns can also use the above parameters with one
change: "Bracket" the US dollar index with a buy stop order
and a sell stop order above the highest high and below the lowest low
after just the first two trading days of January.
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.
© 2007
Pearce Financial, LLC
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