Longer-Term Chart Helps Predict US Dollar Movement

01/06/2010 12:01 am EST

Focus: FOREX

Whether you follow currency pairs or read the headlines, you already know about the heavy pressure on the PowerShares DB US Dollar Index Bullish (UUP). After testing 52-week lows in December 2009, UUP reversed higher to break above the downtrending channel.  Against all (expected) odds, the US dollar gained substantially in the last month.

Since the parabolic bullish reversal started, UUP has not experienced a meaningful pullback until now. It seems as though the inverse relationship between equities and the US dollar remains strong in the new year since today's hard pullback in the dollar fueled a strong rally in all three major indices. That said, we should still be aware of the key levels in the US dollar. As basic as it sounds, this relationship will continue until it stops.

The dollar’s bull trend has more strength than the prevailing trend in equities, so I am expecting this to carry the overall trade (US dollar will continue to lead equities). That said, take a look at each chart below and take note of the new line in the sand that was drawn today. 

US Dollar: 2008-Present

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The longer-term chart shows the technical importance of the support level (green line) that was broken in early December. This generally leads to a test of the new, lower support level at some point in the near future. More accurate timing can be seen in the shorter-term chart at the bottom. With acceleration bands and William's %R you can see clearly that there is a strong bull trend in place—strong enough to trade, actually. 

US Dollar ETF (UUP) Daily Chart with Acceleration Bands and Williams %R

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Essentially, the US dollar can be expected to gain value in the short term unless we see a close below the new key level created today. A close below $22.84 would signal a strong correction in the dollar, which would likely lead to gold testing 2009 highs and equities following suit.

By Andrew Hart of BigTrends.com

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