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This morning, I’m recommending a bullish trade on the Invesco DB US Dollar Index Bullish Fund (NYSEARCA:UUP).
The S&P 500 pulled back slightly yesterday, but I’m still generally bullish. The Federal Open Market Committee (FOMC) is expected to cut rates tomorrow, and companies are reporting better-than-expected earnings.
Though some people believe the rate cut will have an adverse effect on the U.S. dollar, which would be bad for UUP, I think they aren’t taking into account the relative strength of the American economy.
Money Flowing into the U.S.
I’ve been talking about weakness in Europe for some time now, and it appears that their Federal Reserve equivalent — the European Central Bank (ECB) — is preparing to act. ECB President Mario Draghi said yesterday that “a significant degree of monetary stimulus continues to be necessary to ensure that financial conditions remain very favorable and support the euro area expansion.”
Much of Europe already has negative interest rates, however, and that has been driving capital into U.S. markets. That’s one of the reasons why our markets have been doing so well lately. International investors can get better yields and returns in the U.S., so they are pouring money into our markets.
Even with a rate cut, the U.S. is still the best place to put your money, and I don’t think that will change anytime soon for investors.
Looking at UUP’s technical performance, I think other traders agree.
UUP Set a New 52-Week High Yesterday
Investors have known about the approaching rate cuts for weeks, but UUP has continued to push higher. It set a new 52-week high yesterday, and it pulled back slightly. After the rate cut is announced, we may see UUP drop, but over the long term, I expect the dollar to remain strong.
Daily Chart of Invesco DB US Dollar Index Bullish Fund (UUP) — Chart Source: TradingView
Resistance at just under $26.50 could act as support going forward, and UUP could challenge its 2017 high just under $27. As long as the U.S. economy continues to outperform, we can expect the dollar — and UUP — to push higher.
Using a spread order, buy to open the UUP Dec. 20th $27 call and sell to open the UUP Dec. 20th $28 call for a net debit of about $0.20.
Note: Be sure you are opening the monthly UUP options that expire on Friday, Dec. 20, 2019.
About Debit Spreads
A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this call debit spread is a way to lower the cost of buying bullish call options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.
Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.