This chart shows the dollar rally could be in trouble

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.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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