Smokin’ New Year’s Dollar Trade (PM,MO,DXY)

We’re going to recommend you initiate a trade today that we’ve used before with  great success on a number of occasions.

 

It’s a bet on the dollar, essentially, though nowhere in the trade will you see any dollars traded.

 

Hunh?

 

That’s right.  As if by magic and mystery, the trade produces plenty of real dollar profits – that is, of course, if we’re right, and another leg up is imminent for the buck.

 

Let’s start then, by looking at the almighty dollar – both the daily and weekly charts – to get a better idea of how today’s venture will play out.

 

Here’s a weekly pin-up of the buck for the last four years –

dxy tchnical

 

As you can see, after a long sideways drift, the dollar rose steeply from the summer of 2014 through the spring of 2015 (in red).  At that point, it bucked and heaved and spun about, but at the end of the day went precisely nowhere.  And that’s the way it’s been for the last ten months.  Call it a new sideways drift.  The old highs in March were tested in April and again in November, and we’re now awaiting a more decisive move that will indicate which way the dollar trends for the long term.

 

Conflicting Opinions

 

Now, we certainly have our view on the matter, and it goes like this – we’re dollar bulls.  Even though everyone else on the planet appears to have taken the long side of the dollar trade, and even though we’re contrarians by nature, we still feel strongly that the buck’s rise still has a ways to run.

 

magnifine

 

So it also stands to reason that the way we choose to interpret the all-important weekly RSI and MACD indicators is going to be colored by that outlook.  And as far as we can tell, the overbought RSI reads of roughly a year ago (in blue) have now been sufficiently worked off to offer a good chance of a re-ignition of the dollar trade.

 

But…

 

On the other side of the pitch, stands the bear camp, who read RSI and MACD as now headed toward an oversold extreme after such an extended run in the overbought realm.  And they have a case.  Overbought weekly reads eventually do cross lower to produce oversold indications, and the heights to which the dollar has climbed above its longer term moving averages would also argue the righteousness of the bear case.  At the very least, they might claim, additional time is required for the moving averages to ‘catch up’ to the dollar’s current price level.

 

And it could be.

 

But we would counter that the move from overbought to oversold rarely takes place in such a short time frame.  It’s generally a multi-year unwind, so we’re not likely headed there so quickly.  Moreover, as they currently stand, RSI and MACD are objectively unreadable at current levels.  They’re both at or nearing their midway waterlines, so the jury is still out (green lines).  The fact that they remain above those waterlines could also be read more in favor of the bulls than the bears.

 

Drilling Down to get Perspective

 

While the weekly chart gives us a valuable overview of what’s been done and where we may be headed, the daily chart provides a clearer picture of the immediate trading future.

 

Let’s have a look –

 

dxy technical 2

 

This is the daily dollar chart for 2015, and like the weekly, both RSI and MACD indicators (in green) are inconclusive.  Until we see a break from both of them in a single direction, we won’t be able definitively to call the move on the dollar.

 

That said, we like the pennant pattern that’s been forming over December (in red).  It’s a continuation pattern, meaning we could see a move to at least the former highs at DXY 100.50 (black line) before the market decides which way to head thereafter.

 

At that point, the bears see the double top (in black), and expect price to be repelled lower.  The bulls look to a year-long, reverse head-and-shoulders pattern (in blue) that speaks to gains for the dollar to at least the 103 range.

 

And we say that either way, we’re primed for a breakout from the pennant formation any day now.

 

And we’re increasingly convinced it will take us much higher.

 

But you said this wasn’t a dollar trade.

 

That’s right.  It’s not.  It’s a cigarette trade.

 

With the dollar poised to bounce, we’re advising a pairs trade that employs two cigarette companies that used to be one – Philip Morris International (NYSE:PM) and Altria Inc. (NYSE:MO).

 

The company split for various reasons, among them an interest in separating the domestic sale of Marlboros from those that are marketed overseas.

 

And that’s where the dollar comes in.  Because when the dollar is weak, Philip Morris stock gets a boost, as cancer sticks can be peddled to unsuspecting foreigners at much cheaper rates.  When the dollar is strong, Philip Morris declines relative to Altria, because local demand for fags is unmoved.

 

And there you have it.  As the chart below amply demonstrates, strong moves in the dollar are highly correlated with MO outperformance over PM.

 

Have a gander –

 

MO dollar rises

 

The dollar is indicated in blue, its trajectory in red.

 

And the results are quite clear.  When the dollar is rising (at left), Altria handily outperforms PM.  When the dollar is rangebound (at right) the two perform roughly in tandem.

 

We therefore recommend you initiate a spread using CALL options on both of these stocks to take advantage of the pending jump in the dollar.

 

And it goes like this –

 

Here is how to play it and profit:

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Options Trader Elite recommends you consider purchasing the MO January (2017) 67.50 CALL, now trading for $1.08 and selling the PM January (2017) 100 CALL, now trading at $1.01.  Total debit on the trade is $0.07.

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Happy New Year and many happy returns,

 

Matt McAbby

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