Dollar Bulls, Get Ready to Party

01/06/2011 10:12 am EST

Focus: FOREX

Thomas Aspray

, Professional Trader & Analyst

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Chart Analysis: The dollar index futures, after rallying from the election lows at 75.23 to the resistance at 81.50 by the end of November, have since consolidated. While this may have disappointed the dollar bulls, the chart shows that a typical continuation pattern is being formed and the 38.2% support level held on the pullback. A strong close above 81.20 will signal a resumption of the uptrend and indicate a move to the 83.30-83.60 area. The on-balance volume (OBV) has been stronger than prices, suggesting accumulation, which is positive. The PowerShares DB US Dollar Index Bullish ETF (UUP) recently tested the 50% support level and gapped higher on Wednesday. The UUP chart also shows a flag formation, and a strong close above $23.30 will complete the formation, signaling a resumption of the uptrend. The initial targets are at $23.90, with the Fibonacci equality target and 61.8% resistance level in the $24.30-$24.40 area. The volume action in UUP is also positive.

What It Means: Strong action in UUP on Wednesday and early strength in the dollar index futures on Thursday indicate that the dollar is ready to resume its uptrend. This is likely to surprise those who are very bearish on the dollar because of US debt levels. Dollar-denominated assets like US stocks should benefit from a higher dollar. Many of the commodity markets have benefited from a weaker dollar recently, so this may put some pressure on some of these markets.

How to Profit: With the strong action in UUP on Wednesday, I would only look to go long UUP on a pullback to the $22.76-$22.98 area, using a stop at $22.44. If you are adjusting the equity part of your portfolio, I would favor US stocks over stocks in the euro zone.

Tom Aspray, professional trader and analyst, serves as senior editor for The views expressed here are his own.

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