As I’ve often discussed in my Chart School newsletters, there is an inverse relationship between the dollar and the euro. In addition, as the dollar goes, the stock & commodities markets have been going in the opposite direction. So, analyzing the dollar can give you some insight into the possible direction of assets such as the euro, stocks and commodities such as gold and silver.
First, let’s review the long-term chart of the DXY dollar index.
As you can see, the DXY bounced on its long-term uptrend line (black), as we would expect. Had the DXY broken lower, I would have expected the dollar to move lower, thus the stock market, euro and commodities to move higher. However, the DXY having held that support and moved higher, it is not a surprise that the euro, stocks and gold/silver have moved somewhat lower. So, what next?
Let’s take a look at the UUP next. The UUP is an ETF that “tracks” the movement of the dollar. If you wanted to profit from a move higher in the dollar, but didn’t want to trade currencies, you could buy the UUP. Please review the chart below of the UUP:
Taking a closer look, you can see that the UUP has broken through its down trending resistance line. It also quickly came back down and retested that old resistance as a new support. This seems to validate the importance of this level. So, having broken through resistance, one would probably expect the UUP (dollar) to move higher.
What about the euro? Take a look at the FXE, which is the ETF equivalent of the euro:
You will first notice how the FXE and UUP look like mirror opposites of one another. More importantly, the FXE is currently sitting on its up trending support line. If the dollar continues higher, wouldn’t you expect the FXE (euro) to break lower?
The Tale of the Tape: The DXY has tested its long-term support and started to move higher. The UUP has broken through a key resistance level. All signs appear to point toward a higher dollar over the short-intermediate run. A long position in the dollar/UUP could be a great play. This might also be a bad sign for gold/silver, stocks and the euro.
If you choose to trade other assets based on this information, wait for a breakdown in the market you will be trading. For example, if the FXE were to break its key support, you might want to short the euro/FXE. The same could be applied to stocks or commodities like gold and silver.
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!
Christian Tharp, CMT