When the U.S. dollar makes a meaningful move, it reverberates across other asset classes. Over the past 12 months, the dollar index rallied roughly 25%, which in part helped steepen the downward spiral in commodities and emerging-market equities, increased volatility in currencies and helped U.S. interest rates rise.
After a multimonth pause, the dollar index — for which we’ll use the PowerShares DB US Dollar Index Bullish (NYSEARCA:UUP) as a proxy — has continued its upward movement. And now, the UUP ETF looks set to see much higher prices over the next six to 12 months.
Active investors should look to hop onto King Dollar … and respect what other implications a rising dollar brings along.
UUP ETF Charts
To show the 12-month inverse correlation of the dollar versus commodity prices, I plotted the UUP ETF on top versus the iPath Bloomberg Commodity Index Total Return ETN (NYSEARCA:DJP). Next time someone tells you that a rising dollar doesn’t have widespread implications, just point them to this chart, which has seen this ETN — which tracks a wide basket of commodities — plunge more than 30% over the past 12 months, with little relief in sight for now.
Over my career, I have made the most money getting ahead of and riding major fund flows, and thus major trends. I consider the dollar’s breakout in the summer/early autumn one of major proportions, and something that has much further to run.
For a bigger-picture perspective of the dollar’s run over the past 12 months, let’s look at the below chart of the dollar index futures contract.
After topping out in 2001-02, the dollar index began to tumble sharply in part due to the rising euro. After losing 40%, the dollar finally found better footing in early 2008. Eventually, after a volatile and choppy bottoming process, the dollar began to gain better upside traction in 2012 and 2013, which led to the powerful breakout past the multiyear diagonal resistance line in 2014. As a result, UUP by March of this year had retraced 61.8% (an important Fibonacci number) of the entire selloff from the 2001-02 top into the 2008 bottom.
On the daily chart of the UUP ETF below, we then see that after the March top, a healthy consolidation period set in that had the dollar index almost retrace back toward its rising 200-day simple moving average (red line). This worked off the overbought readings from March. After a series of higher lows since mid-May, the UUP last week pushed past the diagonal resistance line from March.
And judging from momentum indicators, plenty more upside looks to be ahead.
While the UUP rally can be played in the nearer-term time frames, I am looking at this as a structural trade with at least three to six months in duration that could see the UUP rise toward the $27 area as a first upside target.
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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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