WINDERMERE, Florida (Stockpickr) -- Get ready for a major counter-trend/short-covering rally in the U.S. dollar. It almost feels crazy to write that because I know it's the ultimate contrarian view, but I think the market is ripe for it. As always on Wall Street, the market loves to wreck the most amount of people at the most inopportune time, and that's exactly what I think is about to happen.
I will spare you the details and all of the bearish arguments for why the dollar is going to plunge and soon be worthless. I am sure most keen market hawks have already heard it all, from Peter Schiff or Jim Rogers or other well-known dollar bears. But even Rogers recently said that the dollar is probably due for a bounce, and I strongly agree with that view.
The rumor floating around the trading community is that a ton of hedge funds are long hard assets and short the dollar. This rumor is easily backed up by raw data. The most recent Commodity Futures Trading Commission report showed that currency speculators had a net short position in the dollar of $29 billion for the week ending Oct.12. That compares with a net short of $30.5 billion the previous week, which was the biggest net short dollar position since at least June 2008.
The most recent CFTC report for commodity positions also shows that large speculators (often hedge funds) are extremely long hard assets. Net speculative long positions in crude oil sit at 209,535 contracts (contracts of 1,000 barrels). What's amazing with this net long crude position is that it's well above the net long position of 152,282 contracts that noncommercial traders had when crude topped in 2008 at $145 a barrel.
The net long positions in copper now sit at 24,017 contracts. Platinum and palladium are also at extreme levels, with 25,639 contracts and 15,379 contracts, respectively, Corn is at 449,834 net longs, and gold is at a record 282,254 net long contracts.
Clearly, we have very crowded trading developing here that could produce the perfect storm for a massive short squeeze in the dollar and a sharp correction in all commodity prices. Commodity prices trade inverse to the dollar, so a counter-trend dollar bounce will spark fast price destruction in hard assets in my opinion.
If I am right, market players need to be prepared for big declines in the
SPDR Gold Trust ETF
iShares Silver Trust ETF
, which track the prices of gold and silver.
Just imagine for a moment if QE2 didn't come in as big as the market is expecting, or if it was delayed longer than expected. I personally believe that most of QE2 is already priced into the market, unless it's some massive number that isn't within the consensus view.
Here 's a look at a
that should benefit big from a counter-trend rally in the dollar.
The most obvious way to play a dollar rally is to buy the dollar. For investors who aren't involved in the currency markets, you can go long the
PowerShares DB US Dollar Index Bullish Fund
If you take a look at the chart, you'll see that the UUP has formed almost a perfect technical bottom at $22 a share. If a counter-trend dollar rally is truly underway, then the UUP should make a pretty significant move. I would look for this ETF to trade up to $25 a share, if not even higher.
Keep in mind that the dollar rally is already underway after China decided to raise interest rates overnight. This action is seen as a surprise in the markets, and it could be just the move that begins the dollar short squeeze. My guess is that today's action by China is probably just the start of more to come from the Far East to break the dollar shorts.
Another way to play a dollar rally is to short any stock that is tied heavily to commodities. I suspect that
Freeport-McMoRan Copper & Gold
will be a big target for short-sellers who want to take advantage of a dollar counter-trend rally.
Freeport-McMoRan is loaded to the gills with commodities such as copper, gold and molybdenum, all of which will take big hits in price if the dollar starts to gain any reasonable amount of strength.
If you take a look at the chart for Freeport, you'll see that the stock has already started to break below a key uptrend line. This is a clear sell signal and I think this stock will trade all the way back toward the 50-day moving average of $81.28 a share, if not even lower.
Another name that could make a bundle from the short side is
, a metals and mining company out of Brazil. This company is also a producer of iron ore and iron ore pellets, manganese ore, ferroalloys, bauxite, alumina and kaolin.
And it produces aluminum, copper, coal, potash, cobalt, platinum group metals and other products. As you can see, Vale is loaded up with commodities that will all take a big hit from a significant dollar short squeeze.
If you take a look at the chart, you'll see that Vale has broken a key uptrend line, and the Moving Average Convergence-Divergence MACD looks ready to signal a crossover, which is a very bearish sign. I think you can short this stock down to $29 to $28 a share. This stock will go even lower if the dollar rally can really catch fire.
Another name that could be a great short on a dollar short-squeeze rally is
Compania de Minas Buenaventura
, a precious metals company engaged in the exploration, mining and processing of gold, silver and other metals in Peru.
Once again, a great play for a dollar rally is to short any stock tied to commodities -- especially a stock that is tied to a number of commodities, since the volatility in the actual commodity price will wreak havoc on the shares.
If you take a look at the chart, you'll notice that just like the rest of the commodity stocks, BVN has broken a key uptrend line. My short target for this stock is somewhere around $42 to $40 a share, if not even lower. The final targets will all depend on how high the dollar can rise in a counter-trend bounce.
>>Who Owns BVN?:
One final way to play a dollar rally is to short the
CurrencyShares Euro Trust
. If the dollar rallies, the euro will trade in the inverse direction as the risk trade is taken off by hedge funds and day traders. The FXE could have a lot of juice left to the downside if the dollar does in fact see a huge counter-trend rally.
Just take a look at the chart, and you'll see that the FXE has also broken a key uptrend line and now looks ready to trade below the 20-day moving average at $137.08. A move below that level should setup a test of the 200-day moving average at $131.59 a share.
To see more short/long stock positions that will benefit from a dollar rally, check out the
portfolio on Stockpickr.
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At the time of publication, author was short the GLD.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.