The U.S. Dollar Index ($USD) has rallied 2% in just over two weeks. That may not seem like much compared to high-flying technology stocks that can move that much in an hour (though not during the recent low-volatility environment). But in the world of currencies, a 2% move in two weeks is HUGE.
The buck had been in a steep downtrend all year. We started looking for the dollar to find a bottom in late August, and again in mid-September. Both times, the $USD chart was starting to form a bottoming pattern with positive divergence on the momentum indicators. So, we figured the dollar was nearing at least a short-term low.
Since then, $USD has moved sharply higher. Take a look…
The buck has bounced all the way back up to where it was trading in late July. And it’s been a pretty good bounce off of the bottom.
But now, the dollar is approaching resistance. And, if history is any sort of a guide, the dollar is unlikely to break through this resistance level on the first attempt.
Look at how a similar pattern on the chart played out in 2016. The dollar bottomed in early May last year. The rally off of that bottom ran into the resistance of a previous high. Resistance held, and the dollar fell back and formed a higher low. It took another month before the dollar was able to break out above resistance.
I expect we’ll see similar action in $USD this time around as well.
The buck has enjoyed a good bounce. Now, though, it’s time for a pause. The dollar is likely to pull back soon and take some time to form a higher low on the chart. A couple of weeks of back-and-forth, choppy action will help the buck build up enough energy to break above resistance on the next attempt.
Best regards and good trading,
P.S. What are your thoughts on this year’s action in the dollar? Will we see the same sort of rebound that played out last year?
Send me your thoughts, along with any other questions or suggestions, right here.
In today’s Mailbag, a reader responds to yesterday’s essay on the death of market clichés…
Jeff, very good summary of all the "known" seasonal things that don't seem to work anymore, at least this year.
Two possible reasons; firstly the huge sums of money that the central banks have printed that are going into stocks because fixed-income and savings accounts pay nothing; and secondly the unrest in most of the world makes our markets look safe to outsiders causing a large inflow of funds that has to go somewhere.
And another responds to last Friday’s essay, dealing with the influence of market makers…
Regarding Ryan’s question as to market makers...I think that sometimes it just takes a bit of patience with them. It also helps to check volume as to trades that move the market up or down. It seems to me the market often moves considerably while only one contract has been executed, so waiting seems to help.
Meanwhile, one reader took Jeff’s advice on giving trades time to work back to normal conditions…
Good news, Jeff! Despite the recent put option trade falling almost immediately after your recommendation, I took your key points and got in at $1.28, which is really $1.20 after the $8 commission.
I can't use margin on naked puts at the two big brokers I use, so, like many of your subscribers, I need to be careful with quantity because I don't like tying up thousands of dollars just to make $100 or $200 when there are other ways to make even more.
But you wrote recently about importance of selling puts to stay profitably with options and earn cash, so I'll do the ones that have a lower stock price and don't tie up as much capital. I had a feeling I could sell for $1.28 or maybe even $1.30 if I waited until end of today, using limit orders, since you explained why the market may rise or stay up till EOQ, and gold stocks tend to fall when the S&P 500 is rising and market is “Risk On.”
For the past couple weeks, emails have poured in from readers asking for more of Jeff’s insight on LEAPs and the best way to use them…
I recently read your response to someone regarding LEAPS. This is a follow-up question. Can one use LEAPS for both calendar and strike price spreads?
Also, as a general rule, is this a reasonable strategy (if numbers work out) or is this complicating things too much?
I wait for your kind response. Thanks much.
Could you please write a special report on trading covered calls on LEAPs, teaching us how to select stocks and rules on what options to trade?
I would be happy to pay for that.
Since "there is a little more than" you can put in a post on LEAPs, how about a special report on this idea?
Could you please provide us with some more details about LEAP strategy? Thank you very much!
Very interested in your LEAPs strategy. I wonder, if you ever have a little time, could you go into more detail about it? In particular, like where the stock will be at expiration, the dividend policy of the underlying stock, implied volatility of the options, etc. Thank you teaching me so much!
Love the Delta Report and have had much success with your recommendations. I am very interested in last Friday’s essay regarding “The Best Strategy For LEAPS”. You describe this as “owning long-term calls instead of the actual shares of stock and then selling short-term calls against the long-term position.” I am very interested in learning more about this strategy.
Better yet, can you take us through a couple of these on real recommendations when the setups allow? I know I’m asking a lot here, but you always deliver a lot as well! Thanks for all you are doing for us.
You said: "There’s a little more to the [LEAP] strategy than I can explain in a brief essay." When you have time, please write a full description of the strategy.
Could you please write a longer essay on the strategy which you like to use LEAPs that you briefly described in your 9/15/17 essay? I use a small amount of my portfolio in call LEAPs, but I never thought of using LEAPs like selling covered calls.
Your suggestion of buying a long-term LEAP on a stock and selling covered calls against that instead of owning the stock and selling short terminals intrigues me, but I fail to understand exactly how the LEAP protects me against a stock jump. Please explain further. Thanks.
I would really like to learn more about this bullish strategy using LEAPs… Teaching us about using LEAPS this way is perhaps beyond the scope of the Market Minute. However, it sounds awesome. How can we learn more? By the way, your trading style is particularly complimentary to that of Richard Wyckoff's price and volume analysis which I have been using for some time. I love it when several disciplines overlap! Makes for a higher-confidence trade. I’m enjoying your service very much.
For you knowledge-hungry readers, there's good news. After seeing this rush of response, Jeff’s decided to write up a primer on his LEAP strategy insight for his Delta Report subscribers. You should be seeing that write-up within the next couple weeks…