Time to look at the dollar?

Back in August I wrote an article in regards the US dollar and its prospects at that time. (To review that article, please go to: http://www.themeshreport.com/and-then-there’s-the-dollar/) In that article, I analyzed the UUP as a way to review the dollar’s trend and support/resistance points.

The UUP is an ETF that allows investors to buy the dollar without actually buying the currency. In today’s market, there has been a decent correlation to the dollar’s movement and the stock market’s movement, but in the opposite direction. So, knowing what the dollar is doing can not only help you know when to trade the dollar currency if you choose, but it can also give you some insight as to what the stock market may be doing, or getting ready to do.

Below is the chart I provided of the UUP back in my August article:

At that time, it appeared that the dollar was breaking higher when we noticed the UUP breaking through its down trending resistance level (red). However, I also mentioned that there might be a concern for the dollar if the horizontal support at around $23.25 were to give way. Now, please look at an updated view of the UUP:

You can see that rather than starting a renewed uptrend, as I personally thought it was doing, the dollar instead turned lower. In September the UUP broke the key level of support at $23.25 that I referenced in that previous article. This was a sign that the UUP/dollar was probably heading lower, which they both did.  As I mentioned at that time, a break of that level would be a great opportunity to short the dollar or UUP.

Well, what’s next for the UUP/dollar? My belief is that the dollar is close to embarking on a new uptrend. Why? Please look at the following two charts:

The first chart above is a 3-year view of the UUP. What you may notice is the obvious support level at $22 on the UUP. The second chart is of the US Dollar Index itself. Notice the long-term up trending support line that I have added. Both of these charts show an immense amount of support at current levels, or close to them. Volume has also been somewhat interesting on the UUP over the last few months as well.

Also, are you a contrarian trader? If so, the Daily Sentiment Index provided by trade-futures.com shows a sentiment reading of 3% on the US dollar. This is EXTREME bearishness. If you need a reference, you might ask what the sentiment reading was back when the dollar bottomed at the end of 2009? 7%. If sentiment is an indicator you use, doesn’t it sound like now could be a time to consider going long on the dollar, especially at the current support levels? Could this also spell trouble for the stock market if a bullish dollar analysis is correct?

The Tale of the Tape: After breaking key supports in September, the dollar fell lower as one might have expected. The UUP/dollar have both reached very important support levels once again. Bearish sentiment has also reached an extreme. This could be a great time to look at entering a long position on the UUP/dollar (one could also short the euro). It might also be a good time to watch for a breakdown in the stock market.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

Good luck!

Christian Tharp, CMT