Why I’m Long The Dollar And How I’m Trading It

  • August 10, 2005
  • Jes Black


FX: Yesterday we bought USD/CHF at
1.2555 with tight stops just below 1.2540. We ended up taking some profits pre-FOMC
at 1.2620 then buying the “sell the fact” at 1.2590 with stops for all positions
moved up to 1.2555. Today’s selloff in London stopped us out but we reentered
long USD/CHF this morning (again, just a nibble with 1/3 a full position) at
1.2558 with stops below today’s low at 1.2520. The reason we are taking a stab
at the long side again is because the dollar is trading to the outside of
downtrend resistance from the July 26 highs alongside clear bullish momentum
divergences. Our hopes for a final spike higher are fading quickly as the
seasonal bullish bias ends next week. Yet being able to place stops so close to
the day’s low allows us great risk control with outsized gains even if we
only see a multi-day rally in USD to correct the recent three week slide.

 

As
expected, the dollar index broke downtrend resistance around 87.90. It then
tested the outside of the same trendline by making new lows (very typical)
and must now muster a rally towards the 88.30 level followed by 89.00.
Similarly, we need to see a decline below 1.2340 in EUR/USD to get a decent
correction because until then the trend remains up. Key support is at 87.00.
Only a move below here would indicate further selling pressure ahead.

 

*Traders
should note the nice trade setup in USD/JPY this morning with the dollar testing
key trendline support at 110.80 from the May lows. If the dollar were to muster
some strength today (look to EUR/USD for the best clue) then this may present
yet another low risk setup to go against the grain.

 

 

 

 


Stocks:  Stock futures are higher
again this morning, but this is typical of the post-Fed reaction where stocks
rally the the day of the hike and the following day but then selloff the next.
We feel the trend has reversed. Last week we said, “The market is very VERY
close to a key top. This means we may again have an opportunity to get short the
S&P 500 in the coming days to weeks.” We feel the stock market topped last week
and traders have a good risk/reward setup to get short the rallies with risk
limited to just above the 1245 highs. Meanwhile, we are quite content with our
call to go long the VIX last month at 10.50 as prices have fallen back to 12.50,
but still giving us ample protection. 

 


Bonds: No change: Bond yields rose
above 4.4% but only a move above 4.6% in the 10-year yield would indicate bonds
are headed lower. Meanwhile the 5-year note is getting pounded by the
speculators and remains the best bond short out there as the market prices in
more Fed hikes to come this year and the next.

 

Regards,

 

Jes Black

 

FX Money
Trends

613 4th St Suite 505


Hoboken, NJ 07030

Tel: 646.229.5401

Web:
www.fxmoneytrends.com



Jes
Black is the fund manager at Black Flag Capital Partners and Chairman of
the firm’s Investment Committee, which oversees research, investment and
trading strategies. You can find out more about Jes at
BlackFlagForex.com.

Prior
to organizing the hedge fund he was hired by MG Financial Group to help
run their flagship news and analysis department,
Forexnews.com. After four
years as a senior currency strategist he went on to found
FxMoneyTrends.com – a research firm catering to professional traders.

Jes
Black’s opinions are often featured in the Wall Street Journal, Barrons,
Financial Times and Reuters. He has also written numerous strategy pieces
for Futures magazine and regularly attends industry conferences to speak
about the currency markets.