Currency Watch: U.S. Dollar Index Threatens Trend Reversal (UUP, UDN, GLD, TBT, TLT)

Corey Rosenbloom:  I’ve been monitoring the changing structure in the US Dollar (NYSE:UUP) Index recently, and there is a very critical index level to watch that will signal an official, structural trend reversal on the larger frame.

Let’s take a look at the current price structure and highlight the critical level that will objectively redefine the prevailing trend.

First, the Daily Chart Structure:

When you’re doing any sort of large-scale analysis of a price trend, sometimes it helps to strip away all the clutter and indicators so that you can observe clearly the simple price (trend) structure.

For a recap, “Structure” refers to the prevailing sequence of swing highs and lows as a market makes a directional move.

Uptrends are thus defined as a sequence of “Higher Swing Highs and Higher Swing Lows” and vice versa for structural downtrends.

The Dollar Index is in an objective (undeniable) structural downtrend as seen by the horizontal lines connecting the series of lower swing highs and lows.

However, that structure (progression) is threatened by a looming reversal in the highs and lows at the $76.50 level.

Why?

In June, the index formed a higher swing low just under $74.00 and then rallied up recently into the swing high pivot at the $76.00 level.

A higher low DOES NOT reverse a structural downtrend by itself, but what would reverse the trend objectively is if the index continued on its progression to the upside and rallied ABOVE the $76.00 level.

In other words, to reverse a structural downtrend, price requires a higher low AND a higher high to break the progression.

Thus, it will be important to watch the $76.50 level very closely in the weeks ahead.

Let’s zoom-in on the down-move so far in 2011 to get a better view of the structural level to watch:

It’s helpful to drop to lower (intraday) timeframes to get a clearer picture of structure as it develops.

I also added a simple Fibonacci Retracement grid as drawn.

As if by magic (I’m being sarcastic), price retraced from the confluence of the $76.00 index level and the 38.2% retracement yesterday.

That will be another level to watch for a bullish breakthrough should it develop.

However, the level that defines a new uptrend from a continuation downtrend will be the $76.50 pivot level from the May high.

A breakthrough there reverses the structure to put in both a higher low and a higher high, signaling an objective reversal.

A large-scale reversal to the upside in the US Dollar Index is almost certain to coincide with a reversal to the downside in the stock market, breaking under the critical support areas I mentioned in this morning’s update.  I will be explaining this in more detail in this week’s Inter-market report to members.

Thus, even if you don’t trade the Dollar Index or FOREX, a widescale reversal in the US Dollar Index trend – should that occur – likely sends shockwaves throughout the market (stocks or commodities) you trade.

Unless proven otherwise soon with a strong breakthrough above the $76.50 reversal level, the trend remains lower for the Dollar.

Tickers: SPDR Gold Trust (NYSE:GLD),ProShares UltraShort 20+ Year Treasury ETF (NYSE:TBT), iShares Barclays 20+ Year Treas Bond ETF (NYSE:TLT), PowerShares DB US Dollar Index Bearish ETF (NYSE:UDN), PowerShares DB US Dollar Index Bullish ETF (NYSE:UUP).

Written By Corey Rosenbloom, CMT From Afraid To Trade  

My name is Corey Rosenbloom, CMT (Chartered Market Technician) trader, educator, analyst, and I am excited to share with you my experiences studying and trading the markets and to hear from you regarding your experiences, challenges, and frustrations, and successes. My goal is to create a community dedicated to reaching out to those who have been burned by the market or are anxious about risking their money to make money in the stock, options, or futures markets. Together, we can share strategies and learn how to overcome crippling fears that keep us from achieving our highest potential.

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