Trading the dollar is getting easier…
About three weeks ago, we started writing about the coming rally in the U.S. dollar. First, Jeff Clark noticed how the dollar had suffered a huge decline… but was in the midst of a bullish chart pattern he likes to trade from the long side.
Then, I noted how the trading crowd had pushed speculative "hate the dollar" bets to a multi-year extreme… the kind of extreme that means everyone is on one side of the boat. Since the market always hurts as many people as it can, extremes like this usually result in the crowd getting dumped at sea.
Below, you'll find a three-month chart of a popular U.S. dollar fund (NYSE: UUP). This fund rises and falls along with the dollar. As we expected, the decline in the dollar has stalled, with UUP bumping off $22.20 per share.
You'll also note that the rally we've been expecting hasn't materialized. Since mid-October, UUP has drifted sideways… and formed a short-term "base" we can monitor.
If the dollar is in for a rally, it's going to blast out of this $22.20-$22.60 area and head into the $23-per-share range. While this move doesn't sound like much, it's a big jump for a major currency.
Since commodities tend to move in the opposite direction of the dollar right now, a UUP move up to $23 would lead to commodities like gold, copper, and oil suffering corrections. You'd want to be long the dollar, short the euro, and avoiding commodities if this move happens.
If all of the problems the dollar faces (the two biggest being government debt and government debt) manage to pull the dollar even lower, UUP will sink past the $22.20 level. This would cause commodities and gold to surge.
So make sure to add UUP and the $22 range to your watch list. When assets like the dollar get into extreme situations like we've detailed in the past few weeks, they're often followed by huge moves. We now have a "road map" to trade it either way.
Disclosure: The author does not own positions in any of the stocks mentioned