A huge question mark these days is “Which way the dollar”? Figure 1 displays ticker UUP – an ETF that tracks the U.S. Dollar. The top clip shows the weekly bar chart and the bottom clip shows the daily bar chart. Both charts also show the current Elliott Wave count as calculated by ProfitSource by HUBB.
Figure 1 – Ticker UUP (Courtesy ProfitSource by HUBB)
As you can see in the top clip, the weekly count appears to be close to completing 5 waves down with the daily count suggesting there is a little further to go on the downside.
Now here is one important thing to note: Elliott Wave counts don’t always work out as drawn (even if using an objective mathematical methodology like HUBB’s that I personally like a lot). Shocking, right? So let’s take a look across “currency land” and see where things stand at the moment.
Figure 2 – FXA (Courtesy ProfitSource by HUBB)
Figure 3 – FXB (Courtesy ProfitSource by HUBB)
Figure 4 – FXC (Courtesy ProfitSource by HUBB)
Figure 5 – FXE (Courtesy ProfitSource by HUBB)
Figure 6 – FXY (Courtesy ProfitSource by HUBB)
The Euro (ticker FXE)
Because it is the most heavily traded, let’s focus on the Euro. In Figure 5 we see that the EW count is projecting a move to at least 122 for ticker FXE by Apr 6. With the caveat that this is NOT a recommendation, let’s look at two ways to play such a move.
Play #1 – Buy 100 shares of FXE
As I write, FXE is trading at $117.78, so to buy 100 shares would cost $11,778. A rise to $122 a share would produce a gain of $422, or +3.6%.
Play #2 – Buy a Call option on FXE
There are a lot of options to choose from, and there is NOT one best choice. Buying out of the money costs less and gives you more leverage but also has the highest likelihood of expiring worthless. So we will consider an in-the-money call options as something of a “stock replacement” strategy.
Buy 1 Apr20 FXE 115 call @ $3.15
This trade costs $315 to enter (versus $11,778 to buy the share). The particulars appear in Figure 7 and the risk curves in Figure 8.
Figure 7 – FXE call (Courtesy www.OptionsAnalysis.com)
Figure 8 – FXE Call (Courtesy www.OptionsAnalysis.com)
This trade has a “delta” of 92.83, which means that it will emulate a position of long 93 shares of FXE. The breakeven price is $118.15. If FXE is at any price below that at option expiration this trade loses money.
If FXE reaches $122 this call will be worth at least $700, a profit of 122% on an investment of $315. Of course, if FXE falls apart instead the entire $315 could be lost.
Summary
Does the U.S. Dollar have another down leg in the offing? And if so, will currencies such as the Euro rally? It beats me. As such, remember that I am not “recommending” this trade nor suggesting that it will generate a profit.
But if he U.S. Dollar experiences one more down leg there is an opportunity for traders. The key – as always – is to consider the trade off between reward and risk.
Jay Kaeppel
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
