The Annual Buck Hunt (US Dollar Index Trade)
"Trading the World" A Special Report
by Pearce Financial, LLC
January 9, 2009

Based on trading activity and reports, the following markets are setting up for potential trading opportunities.

It’s that time of year again! The beginning of January is open season on the US dollar index and time for our annual buck hunt! This trade has become a tradition at Pearce Financial as it is one of our favorite trades of the year. In short, the "Buck Hunt" is a high-probability trade for a long term position in the US dollar. The parameters for the trade is set up in the first few trading days of January every year.

The beginning of January is an important time frame for the US dollar. Quite often, the high or low for the entire year is established in this time window. Perhaps it's due to the fact that large traders and hedge funds are returning to the markets to begin a new trading year. Or maybe it's due to the Fed setting the tone for the year's US interest rate policy at the first FOMC meeting within the first few weeks of the New Year. Anything could happen now: Maybe the greenback will decline in 2009 as the economy gets worse... or maybe the greenback will rally on renewed hope as our new US President takes office. Perhaps the buck will soar as a ‘liquidity crisis’ continues to create a demand for US dollars...or will the US government’s bailout policies been seen as having highly inflationary consequences and cause investors to flee US assets? Will tensions in the Middle East ease or will it get even worse? Even if we had the answer to this question, how do we know what the effect will be on the US dollar? The fact of the matter is that nobody has a clue what the future will be. Therefore, the best that we can do is make projections based on probabilities. As technicians, we have an edge here. Our work is compiled by using data that is unbiased, historical fact. Here's our big observation:

Over the last twenty-two years, the US dollar index has established a major high or low - quite often the high or low for the entire year during the first eight trading days of January.

The numbers are astounding: During twelve of the last twenty-three years that the US dollar index futures contract has been in existence, the high or low for the entire year was made within the first two trading days of January. That’s fifty-two percent of the time! During fifteen of the last twenty-three years (65%), the high or low for the entire year was made within the first eight trading days of January. Odds like that are worth speculating on. According to "Random Walk" theory, this should not happen. If the markets are truly random, then the first two trading days out of roughly 250 trading days for the year has less than one-tenth of a percent chance of establishing the high or low for the year...yet it has been 52% for over two decades! Fortunately for us technicians, facts always trump theories.

Here's how we will use this data for the trading strategy:

First, we will allow the buck to trade for the first eight trading days of January to establish a price range.

Second, we will "bracket" the US dollar index by placing a buy stop above the highest high of the first eight trading days and a sell stop below the lowest low of the first eight trading days. The market entry will be initiated when one of the stop orders gets elected. The other stop order will then become the initial protective stop for the position.

Third, once the trade has become favorable by a significant amount, the protective stop is then moved to the original entry stop order price to reduce the risk down to just the commissions and potential price slippage. Traders with multiple contracts may also want to liquidate half of the position at this time as well. This locks in a net profit on the trade.

Fourth, if we continue to ride this trade all year without getting stopped out, we will exit the position during the last trading week of the year to complete the trade. Then we will simply wait for the new trade parameters for the next year.

Aggressive traders willing to trade on lower odds for bigger returns can also use the above parameters with one change: "Bracket" the US dollar index with a buy stop order and a sell stop order above the highest high and below the lowest low after just the first two trading days of January.

That's all there is to it! It’s simple, but it’s effective. As always, you should assess the risk on this trade and make sure it is compliant with your financial/emotional risk parameters before entering any trade. You may also want to consider using options in lieu of futures contracts on the US dollar index to further control your risk.

Disclaimer: There is risk of loss in all commodity trading. The data contained are believed to be reliable, but have not been independently verified by Pearce Financial. Accordingly, such data cannot be guaranteed as to reliability, accuracy, or completeness, and as such are subject to change without notice. Pearce Financial will not be responsible for any indirect, compensatory, or consequential damages, including loss of profits which may result from reliance on this data. Pearce Financial and/or its Principals and employees may or may not follow strictly any or all of the trading recommendations contained herein. The risk of trading futures and options can be substantial. Each investor must consider whether this is a suitable investment. Past performance is not indicative of future results.

© 2009 Pearce Financial, LLC

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