The U.S. dollar surged to its highest level in years in 2016, but Todd Gordon of TradingAnalysis.com believes the greenback rally could be on its last legs.
"The dollar's had an amazing run to the top side on the back of the Fed beginning to normalize interest rates," Gordon said Monday on CNBC's "Trading Nation." "But we're starting to see evidence that that run is getting tired."
After a big rate rally, sliding bond yields have recently put pressure on the dollar, and Gordon expects this trend to continue. From a technical standpoint, the trader believes that an intraday chart of the dollar-tracking ETF (UUP) signals that the dollar rally has run its course.
More specifically, Gordon says that while the dollar had been making "higher highs" on the way up, UUP has since made lower lows, which suggests "a change in trend."
"We've seen a bit of a snapback here in the market and I think this little pullback is an opportunity to sell near term for a continued push lower," he said.
Since implied volatility for the UUP, or options prices for the UUP, are high, suggesting that options are expensive, Gordon wants to sell calls instead of buying puts to make his bearish trade. He wants to sell the Jan. 27 weekly 26-strike call and buy the Jan. 27 weekly 27-strike call, which leaves him with a 43-cent credit per share.
In order to make money on the trade, Gordon needs UUP to close below the break-even point of $26.43 on Jan. 27 expiration. If UUP closes below the $26 level, Gordon would keep the entire 43-cent credit. If UUP rises above $27, Gordon would see a maximum loss of 57 cents.
The trader explains that the reduced chance of seeing a loss makes this a good trade, despite the skewed risk-reward relationship.