Profiting Thrice in Champagne & Ice (GLD, FAS, UUP)

Today’s letter is going to touch upon several major investment trends that we’ve been discussing here for years. And they are –

• Dollar strength…
• Precious metals (and overall commodity) weakness, and…
• A financial sector that will lead the broader equity indexes higher.

Along the way, we’re also going to close out some trades and open a new one.

So let’s start with the dollar.

yarse

Top Dollar

Back in mid-January of this year we made a decision to hold on to our stock in the PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP), a proxy for the U.S. Dollar Index, after it was PUT to us in a losing options trade.

The letter was called January Expiration Profits, and our rationale for holding the trade (even though the stock was at $21.82 and we were compelled to buy in at $22) was that the buck was on the rise, and we’d quickly find tidings of profit and joy in just sitting tight with our shares.

And the good news is, indeed, we have reaped profits.

O Righteous Day! Calloo! Callay!

But it took somewhat longer than we anticipated.

The buck veered sideways to lower in the ensuing months and only recently has she turned sharply toward the Arctic Pole, in a move that has many wondering if there’s any juice left to the move.

Look here –

uup9914

It’s as plain as a snow-covered mountain that the buck’s rise has become quasi-parabolic (in red) and long bets at this stage are pure gambling.

Look at the RSI and MACD indicators (in blue), both of which are extended, particularly the former, which first punched above the extreme overbought 80-level last Friday.

That’s enough for us to conclude that the time for gathering profits is now. Even if we saw further gains for the dollar going forward – and we do – we’d still be obliged to take money off the table. We can’t afford to see another lengthy delay before we return again to the same levels we’re at now.

And that’s our take – the dollar will rise again, but not before it consolidates here for a short time – at least until the overbought situation on the RSI and MACD indicators have been worked off, and they both return to their midway waterlines.

That said, let’s step back and take a look at the weekly chart, where we’ll see a broader perspective and, in this case, a more mixed picture.

uupweekly99

The dollar’s climb of the last two months has perched her above the long term weekly moving average (in orange), but has also brought her close to a dangerous RSI read (in blue). With that indicator approaching 80, we could see a lot of technicians pulling out of their long dollar bets in anticipation of a weekly overbought read, a development that would be disastrous for the bulls.

On the other hand, the weekly MACD indication only last week turned bullish, confirming RSI’s surfacing in early July with its own rise above the midway waterline.

Bullish or Bearish?

As we stated above, the picture is mixed, but in our view, it’s not worth chancing another percent or two to risking losing even more.

Our recommendation is that you sell your UUP shares at the market today for $22.43.

That’s a profit of 2%. Nothing to write home about. But a profit, nonetheless.

woah

That’s right, and so it has been.

And though we could see a consolidation now in gold that corresponds with a temporary decline in the dollar index, we still believe the longer-term prospects for the precious metals are lower.

The last time we addressed gold in this space was to close down a profitable trade at the beginning of August. And that was a long time ago. We think it’s time to open a new initiative today.

It’s going to be fairly simple, though gold’s progress lower may not be.

That is, we see a decline, but it won’t necessarily come in a straight line. There could be plenty of zig-zagging before we reach the bottom.

And it’s for that reason that we prefer to sell CALLs on the metal than to buy PUTs. We simply don’t want to put a time-specific limitation on the trade.

Look at the chart of the SPDR Gold Trust ETF (NYSE:GLD) –

gld99
GLD is nearing support (in blue), but neither volume figures nor RSI (in black) are showing signs of capitulation.

We’re therefore going to sell CALLs above resistance at $125 (in green).

The Profit Hunter therefore recommends you consider the sale of ten (10) GLD September 125 CALLs, each now going for $0.28, for a total credit to you of $2.80.

We’re going to wrap it up today with a recommendation that you close out a trade we opened on July 29th in a letter called When Banks Go to Heaven.

There we told you to open a speculative long position on the Direxion Daily Financial Bull 3x Shares ETF (NYSE:FAS) using the October 105 CALLs, then trading for $4.80.

And what happened?

Sure enough, the markets moved higher with strong support from the financials, so our leveraged FAS options (trading off a leveraged stock) moved wonderfully in our favor.

Take a look –

fas
What cost us $4.80 now sells for $6.60.

That’s a gain of $1.80 or 37.5% in just six weeks.

And we like it.

Why not hang on for greater profits and bathe in champagne all weekend long?

• Because anything could happen, and we see no need to risk a great take over a bit of greed, and

• That rash on the soft spot couldn’t handle it.

Youch!

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The Profit Hunter recommends you consider 1) selling your UUP shares, 2) selling ten (10) GLD September 125 CALLs, and 3) selling your FAS CALLs, all as outlined above.

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The Profit Hunter recommends you consider 1) selling your UUP shares, 2) selling ten (10) GLD September 125 CALLs, and 3) selling your FAS CALLs, all as outlined above.

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With love of the hunt,

Hugh L. O’Haynew, Senior Analyst, The Profit Hunter

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