Hey There Income Hunter,

The new most crowded trade may be a long dollar position vs a short euro.  

Now, you probably know I hate joining the crowd on trades because, by definition, the probability is when things go against you, it will happen very fast.

It’s similar to being in a jam-packed restaurant trying to exit through a revolving door when someone yells “fire!”

I have made good money being short the Euro, short the Euro Bank ETF (FUFN) and short the French stock market (EWQ) … 

I closed all three trades this week as the consensus narrative is now that the US is safe and China and Europe are not … 

Today, I’ll run through the data that supports fading the consensus – and it may pay very nicely in the weeks ahead. 

Invesco Euro Currency Trust (FXE)

FXE is an ETF that closely tracks the FX euro/US dollar currency pair. You can trade options on FXE, and with an implied vol around 12%, it is easy to manage.

The key is to catch the turns in trends when you can make a lot of money.

And we may be heading toward one of those turns in September. 

Let’s take a look at the charts for FXE’s technical positioning …

The first thing to notice is the negative Relative Strength Index (RSI)/price divergence. This is a reliable indicator of a possible reversal in the stock since the lower low was not confirmed by a lower low in RSI.

Also notice the one-way trend since the middle of last year when the Fed admitted inflation was not transitory and the market started pricing in a tightening policy. 

You see, a tightening policy means higher interest rates and that attracts capital into that currency where investors can earn better returns.

Well now the Euro Central bank (ECB) is about to begin a tightening cycle because their inflation is soaring. 

The ECB may raise their rates .75% as soon as Sep-8 so we could see a snapback in the euro as the Fed moves closer to the end of the tightening cycle in the US. 

You can also do the trade by shorting the Invesco USD Index ETF (UUP). UUP gives you added diversification since the Japanese yen and UK sterling are also held within the ETF. 

I purchased put spreads to Oct. 21 on UUP. Here is the technical set-up of UUP…

Same set up in UUP as FXE. The RSI/price divergence is subtle here but you also have a bearish Japanese candle formation with a long stem above the body, which covers the price trend from open to close. 

Bring It Home

I like to be early when anticipating a change in trend. That approach gives me the best risk/reward ratio.

If UUP makes a new high and closes above the highest close for two consecutive days I may close the position or simply hedge it, buying a cheap bullish option strategy.

If traders do get a correction with some volume behind it, then can add on and maximize gains …

I have a hunch September could be a wild month and we could begin to see a shift in flows away from the US.

UUP is a great signpost for that shift.

Questions? Drop them in the comment below or shoot me an email.

Live and Trade With Passion My Friend,

Griff