Make a Play on the Mighty U.S. Dollar (UUP)

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The U.S. dollar — represented by the PowerShares DB US Dollar Index Bullish (NYSEARCA:UUP) — has seen a massive rally over the past 12 months. And this rally looks to have further upside through a multiweek/multimonth lens, as the charts, the structural picture and the currency pairs that make up the index all point to a higher dollar.

beatthebell_185x185The ebbs and flows of the U.S. dollar, still the world’s reserve currency, affect global markets across asset classes. Global macro markets tend to reflect important changes in interest rates, and to some extent, in currencies first, before trickling over into equities.

We use the UUP ETF, which tracks the U.S. Dollar Index, to play big macro-led moves in the dollar. The dollar index simply measures the value of the U.S. dollar relative to a basket of foreign currencies. Specifically, the basket of securities is made up of the euro, Japanese yen, pound sterling, Canadian dollar, Swedish krona and Swiss franc.

As such, it’s important that we look at how each one of these currency pairs looks versus the dollar and if they give us a unanimous message. At the moment, they absolutely do — each currency in the basket is looking to weaken against the dollar.

Let’s quickly look at the charts of the two biggest weightings in the dollar index: the Euro and the Japanese yen.

The EUR/USD pair has been consolidating for a few months and now looks ready to resume its downtrend (i.e., euro weakening, USD strengthening), so the pair would resolve lower on the chart and out of the bearish wedge pattern.

euro usd
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The USD/JPY in May and early June stage an important breakout and has been consolidating above previous horizontal resistance ever since. The trend looks to resume higher, i.e. the dollar to rise, the Japanese yen do fall, hence the pair to rise.

euro u.s. dollar usdjpy
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UUP ETF Charts

Looking at the multiyear weekly chart of the dollar index as represented by the UUP ETF, we see the big breakout and rally that the dollar index had from summer 2014 into the March top. The chart has been in consolidation since then, in what could be considered a bullish pennant or falling wedge pattern. Either way, it looks bullish, and bullish patterns (as you’d imagine) typically resolve to the upside.

UUP weekly
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On the daily chart of the UUP ETF, we see that it continues to hold above its rising 200-day simple moving average (red line) and is getting closer to break out of the bullish pattern from the weekly chart above (i.e., past diagonal resistance from the March top).

An additional bullish catalyst for the dollar is that once the dust begins to settle somewhat around the Greece headlines, to the fore should once again come the European Central Bank’s quantitative easing program, which is bearish for the euro and thus should push up the dollar index.

UUP new
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Active investors could look to buy the UUP around current levels with a multiweek/multimonth upside price target near $26.20. Any major bearish reversal would call the trade off until another bullish reversal rears its head.

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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, TheEssence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/us-dollar-index-uup-etf/.

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