US Dollar Topping Pattern? (UUP, UDN)
The US Dollar Index is a weighted index of the value of the US Dollar versus a basket of other currencies, mostly weighted against the Euro, British Pound and Japanese Yen. This one of my main tools when doing Global Macro analysis. Trillions of US Dollars are traded in global currency exchanges on a daily basis, so it’s an understatement to say that significant movements of the Greenback in the global forex market have an important effect on markets around the world.
Important Levels
Let’s have a look a bit further back until 2008. The below chart illustrates the US Dollar Index on a weekly basis over past couple of years. This is to give you a reference point for the current levels compared to other important peaks and bottoms.
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US Dollar Index Weekly Nearing Crisis Levels
We can clearly see the bottom of the US Dollar Index in the summer of 2008 when Crude Oil was trading at a peak of $149 per barrel. I think everyone who drives remembers that summer. This is followed by a sharp rally in the Greenback driven by the acceleration of the financial meltdown. Last time I checked, we were in better shape than late 2008 and early 2009. I don’t think the dollar will remain this strong for long.
This trend of a strengthening US Dollar continued until March when the Federal Reserve announced very aggressive policies in an effort to stabilize the financial system. These policies drove the value of the Dollar down and is a way of re-inflating the economy and markets with easy money.
Significant Trend Changes
At the end of November 2009, the US Dollar Index put in a bottom and began a V-Shaped trend reversal and has rallied about 17% from the lows. This is due to a number of relief programs, such as swap lines, had ended. Most recently, it looks like we are seeing a topping formation in the US Dollar Index and this comes as the Federal Reserve announced that it would re-open the swap lines in order to provide liquidity to the global financial markets once again.
US Dollar Index Daily
The chart above is a daily chart of the US Dollar Index. One way to trade it is with the PowerShares DB US Dollar Index Bullish ETF (NYSE:UUP). What I see taking shape is a possible double top pattern with the 87.50 level as the main resistance level. Not being able to break through this level on two attempts and a bearish MACD Divergence suggests that this level is unlikely to be broken. A clear break of the 85 level will confirm this top has held and a reversal will ensue.
EURO Bottom Taking Place?
This could be a signal of at least a short-term bottom in the Euro which has been utterly destroyed in the past few months. The chart above shows the EUR/USD bottoming at a 4-year low. The downward trendline is nearing the support level and clear break of either one of these lines will indicate the future direction of this currency pair. Technical analysis also shows a similar divergence seen in the US Dollar Index, but in this instance it is bullish.
This could also mean that the next leg up in commodities, which are denominated in US Dollars, might be just around the corner. I’ve covered some early signs of a possible bottom in commodities in previous posts.
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