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It's Time to Buy the BuckBy Jeff ClarkThursday, September 3, 2009 Betting against the dollar is a popular trade right now. Maybe too popular.
The Daily Sentiment Index, published by Jake Bernstein, recently reported a mere 3% of survey respondents were bullish on the greenback. That's among the lowest reading of the past 20 years.
Not since Zimbabwe printed its first 100 trillion dollar note has a currency been more maligned and despised. And with good reason...
The national debt is approaching $12 trillion. The Treasury is printing greenbacks around the clock, and Federal Reserve Chairman Bernanke has been tossing them to the masses like Mardi Gras beads on Bourbon Street. So it's no wonder sentiment toward the dollar is bearish.
But as we've seen so many times before, when everybody lines up on one side of a trade, the odds favor it going the other way. Consider what happened in July 2008. The dollar index was pounding out new lows, and the Daily Sentiment Index dropped to just 5% bulls. It seemed everyone was bearish on the buck, and they were betting heavily on its demise. Four months later, the dollar index had rallied over 20%.
We're seeing something similar today. Everyone is convinced the dollar is a doomed currency. And they're probably right over the long term. There are a lot of stops on the way to the graveyard, however. And like the monster, Jason, in all those Friday the 13th movies... just when you think he's dead for good, there's another sequel in the making.
Take a look at this chart...
 The first circle back in July 2008 highlights the previous bottom in the dollar. The circle in March shows where the dollar peaked.
Today, the dollar index chart is morphing into a bullish rising-wedge formation. If the dollar breaks out of this wedge to the upside, its only near-term resistance is at 81. Above that level, it's smooth sailing all the way back up to 86.
The best way to make this trade is through the Power Shares U.S. Dollar Index Bullish Fund (UUP). UUP tracks the performance of the U.S. dollar index. So it rallies along with the greenback.
If the dollar behaves like it did the last time everyone was so bearish, UUP could be good for at least a 10%-15% rally from here over the next few months. That'll be a nice way to cushion the blow of a declining stock market.
Best regards and good trading,
Jeff Clark
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