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The Dollar Trade

Today's dollar index trading idea comes from something Danny Riley said yesterday in the office after the close. Scanning the headlines while answering emails and messages, he said, "We look like $^#&in' idiots around the world!" It was a hard point to argue. Myself, I put more of the blame on the House Republicans letting their internal dispute damage our economy and reputation (and possibly our credit rating).

But I understand people who are mainly concerned about the national debt. (I hope they were worried back when Pres. Bush nearly doubled it, too.) And I understand those who are disgusted with all politicians. Even Pres. Obama knows that this victory is a Pyrrhic one at best.

But MrTopStep is about trading, not politics. What can responsible traders do in the aftermath of this needless fight that is based on sound trading principles and not gimmicks or speculation about the news? When in doubt, I look for someplace solid to plant my feet. I go back to a few simple truths, the things I know to be true, partly because I've been burned by ignoring them.

The only truth is price.

The trend is your friend.

OPPORTUNITYISNOWHERE. If you read that as "nowhere," try again. It says "Now. Here." There is always a path to profit.

And from James Michener's wonderful novel Centennial, a line I've loved since I was a kid: "If you want horses, go where the horses are."

Let's go with this idea that we do look like idiots to the world. If so, we're not the only idiots. The world is full of national and international buffoonery. But we are the only idiots who also have the world's reserve currency.

The fuel in the world's cars and power plants is bought with dollars; precious metals are traded in dollars; the rice cookers and ovens of planet Earth may be filled using local currency, but the global price of grain is quoted in dollars. Even criminals prefer dollars. Try trafficking in arms or human beings or drugs and paying the cartels in yen or rubles. Bitcoins might work. The world is upset by our government's incompetence because their fuel, their food, even their crime is financed indirectly by the strength of our economy.

That's why China takes the rare step of publicly advising us not to put their investment in us at risk. That's why the IMF lectured us in a tone they normally reserve for banana republics. The sad truth about this debt crisis is that nothing is over. The desire of some in Congress to burn the place down in the name of small government and the desire of others to simply see Obama fail, those haven't gone away. And the president's obstinacy can't get better when he finds so little reason to even try for compromise. This heart attack has been stopped, but the patient will go on smoking and living on doughnuts and cheeseburgers.

Short-sighted thinking and short selling the dollar

That means that the factors that weakened the dollar will continue to weaken the dollar. But since everybody is stuck with the dollar, that means our weak dollar is everyone's weak dollar. If the world wants it stronger, they have to strengthen our economy despite the best efforts of the worst of us to weaken it.

In the meantime, a weak dollar policy can have its upside. After 2011′s debt ceiling shutdown, the dollar index fell. The cheap dollar led to a small but helpful rise in US exports, despite the rise in oil and gasoline prices.

The dollar index is making a similar move now. And that may not be a bad thing. A weak dollar policy, in any case, is likely to help companies show good short-term earnings. The extreme right wing of the Congress aren't the only myopic thinkers willing to trade long-term security for short-term spectacles.

As always, use stops and keep an eye on the 10-handle rule. Don't forget to catch MrTopStep on The Closing Print video found under the OptionsTV page (top bar). We report directly from the SPX pits, wrapping up the day and positioning for trade tomorrow.

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