The Dollar, Two Ways

I’ll admit… sometimes I just can’t make a decision.

I discovered the joy of veal while studying in Italy about 10 years ago. Ever since then, I become paralyzed when ordering this tender, buttery delight. I flip-flop between veal piccata and veal saltimbocca every time. Do I feel like the acidic, tangy piccata… or the salty, earthy saltimbocca…

Sometimes investors waffle too. But this doesn’t have to be a sign of weakness. The best traders in the world will tell you risk management is far more important than forecasting price direction. In fact, many traders purposely design alternrnative trades – one bullish and one bearish – letting the market’s invisible hand choose which side to take.

If done correctly, this is the trader’s equivalent of having one’s cake and eating it too… or having your veal prepared two ways. Right now, the U.S. dollar is on the menu…

The greenback has rallied 5% since the beginning of February and lost about 2% of that last week. And I believe the dollar will head higher over the next few weeks. I saw a strong clue of this in today’s candlestick patternrn…

See larger image

The market opened last night (Sunday evening) at about 82.40. It immediately sold off well below 82. Interestingly, the decline was halted at exactly the 38.2% Fibonacci retracement level (circled in yellow).

Then, not only did the dollar regain its open price of 82.40, it went on to trade much higher, reaching nearly 83. This is a strong indication of sentiment – specifically that the bulls have wrestled control away from the bears.

That said, 83 seems to be a formidable resistance zone so we can’t rule a bearish trade on the dollar out.

Either way, the dollar will break out of the 82.50-83 consolidation range and a new trend will develop. Here’s how to make sure you’re on the right side when it does:

1) Go Long UUP – Buy on a breakout above $22.60. Set a profit target at $23.10 and a stop loss order at $22.40. If this stop loss order is triggered, move on to this bearish trade…

2) Go Short UUP – Sell short on a breakout below $22.40. Set a profit target at $22 and a stop loss order at $22.60.

Both the bullish and bearish trade scenarios offer favorable risk:reward ratios, so if the first trade is a loser and the second a winner we should still come out ahead.

But wait… what about Cyprus!? Will our dollar trade fall victim to the news cycle’s whipsaws?

Actually, I don’t think Cyprus is moving the dollar market right now. The dollar declined last week, when the Cyprus debacle “should have” driven safe-haven dollar buying. Then the dollar rallied early this mornrning after a deal was announced (which presumably should have reignited the risk on trade, and dollar selling… but didn’t).

Let’s keep the news chatter in the background (another strategy of successful traders) and let the dollar’s next break out speak for itself.

Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.